Executive Summary

• What’s new: The PRA has published a discussion paper on alternative life capital, inviting feedback from UK life insurance sector stakeholders on potential policy changes that could allow UK life insurers to transfer risk to capital markets.
• Why it matters: There is currently no clear and practical way for capital markets to provide capital to UK life insurers outside traditional equity and debt capital markets. By facilitating more practical ways for capital markets to provide capital to UK life insurers, UK life insurers will be able to write less expensive life insurance policies and reduce life insurance coverage gaps.
• What to do next: Given the PRA’s openness to considering a variety of alternative life capital arrangements, UK life insurance stakeholders should consider submitting thoughtful responses to the paper. The PRA has requested responses from stakeholders by 6 February 2026.

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Overview

On 14 November 2025, the Prudential Regulation Authority (PRA) published Discussion Paper 2/25, “Alternative Life Capital: Supporting Innovation in the Life Insurance Sector,” which starts the PRA’s engagement with stakeholders in the UK life insurance sector on policy changes to enable UK life insurers to raise alternative capital by transferring defined tranches of risk to capital markets. UK life insurance stakeholders should consider submitting thoughtful responses to the paper, and these are requested by 6 February 2026.

The paper highlights the challenges faced by UK life insurers raising equity and debt capital. The paper does not discuss how the UK regulatory regime might be contributing to these challenges. Instead, the paper presents alternative life capital structures as a potential solution (at least in part) to those challenges. The PRA expresses openness to considering innovative structures (including, but not limited to, insurance special purpose vehicles (ISPVs)) and in working collaboratively with key stakeholders to further develop alternative life capital in the UK.

The paper includes helpful insight into how the PRA is approaching the challenges and opportunities posed by alternative life capital. Nonetheless, some key ideas and strategies found internationally are missing — such as how regulation could foster the creation of domestic life or composite reinsurance companies as a way of relieving the pressures on primary carriers.

What Type of Investment Does the PRA Envisage Facilitating?

The paper makes clear that the PRA is focussed on certain types of alternative life capital structures that will enable patient capital to be invested into UK life insurers. The paper includes detail on what the PRA considers to be patient capital, namely capital:

• Invested in line with the long-term nature of the UK life insurer’s liabilities.
• Provided by an investor willing to forgo an immediate return in anticipation of more substantial returns over time.
• That allows for the development of UK productive assets by UK life insurers over the long term.

What Potential Use Cases Does the PRA Envisage for Alternative Life Capital? 

The paper details the following potential use cases for new alternative life capital arrangements, including:

• Patient asset deployment. The PRA’s view is that if UK life insurers had access to cheaper long-term patient capital, the insurers would have more time to identify and invest in high-yielding investments, presumably in the UK.
• Demographic reinsurance capacity. UK life insurers could diversify their demographic risks away from life reinsurers, while allowing investors to invest in “uncorrelated” risks.
• Management of credit risk concentrations. UK life insurers could use alternative capital providers to assume certain of their credit risks, thereby freeing up some of the UK life insurers’ capital.
• Supporting annuity transactions. UK life insurers could use such alternative capital to back a particular block of annuity risk.
• Breadth of life insurance business models. The PRA notes the flexibility that alternative life capital could provide UK mutuals.
• Product development. The PRA also notes how alternative life capital arrangements may be used to address coverage gaps.

Alternative Life Capital Principles

The PRA has set out six high-level considerations that frame its current thinking on how it will approach alternative life capital arrangements:

• Principle 1: The quality and quantity of capital required to support insurance risks should not be lowered through the use of alternative life capital structures.
  • The PRA clearly states that any alternative structure should only result in a change in the source of capital and should not change the amount and quality of capital held to support insurance liabilities. This should be read to mean that Solvency UK requirements with respect to the amount and quality of capital should be adhered to with respect to the risks ceded as part of the alternative life capital arrangement, but, subject to those constraints, asset mix could change to take advantage, for example, of an investor’s asset management capabilities.
  • The PRA also states that any notes or other instruments issued to investors should be of no lower quality than own funds instruments. This is, in our view, an unduly restrictive principle and potentially limits the flexibility of alternative life capital arrangements as it effectively precludes “synthetic sidecar”-type arrangements in respect of particular blocks, which is a missed opportunity.
  • UK life insurers should only be able to take credit for the impact of the alternative life capital arrangements to the extent that there is risk transfer, and provided that principle is strictly part of any alternative life capital regime, we do not foresee any particular issue with relaxing the requirement that notes or other instruments issued to investors should be of no lower quality than own funds instruments (i.e., a fully funded note which is linked to the profit or loss on a particular block should be treated like an equivalent fully funded reinsurance risk mitigation technique).

• Principle 2: The risk transferred to the capital markets through alternative life capital structures should be contractually bounded and time-limited.
  • The PRA draws a helpful distinction between large life insurers with long-term liabilities, where there is an underlying assumption that the life insurer will, if required, raise additional capital to meet future insurance obligations, and vehicles that necessitate a more prescribed set of requirements where it cannot be assumed that new capital can and will be raised to meet future losses.
  • Therefore, borrowing from concepts inherent in general insurance linked securities, the PRA expects that any liabilities of an alternative life capital vehicle will be limited to the amount of capital paid in at inception of the arrangement and that such arrangements will only provide capital relief to a cedant UK life insurer for a defined period of time. The UK cedant life insurer must be sure at all times that the alternative life capital structure is funded for the duration of the alternative life capital arrangement.
  • Nonetheless, this ignores two linked points: (i) There is an appetite for securities that run off over the length of the underlying liabilities (especially if those securities are marketable); and (ii) a security does not need to cover the entirety of the risk in the liabilities — it can cover a defined monetary amount of it — in which case this concern is not relevant.

• Principle 3: Cedants will need to manage tail and residual risks resulting from their use of alternative life capital structures.
  • This principle is common across all risk mitigation techniques. The UK cedant life insurer must provide sufficiently for any risks that remain after taking the alternative life capital arrangement into account. So, for example, should the funding cover a 1-in-10 to a 1-in-300 stress scenario, the insurer would have to manage the risks outside that range as part of its own risk management processes.
  • The use of alternative life capital structures should not generate material gaps, even if the probability is low, that result in underfunding or mismatches between the risks and the funding available (taking into account the often long duration of UK insurance products).
  • The PRA notes that UK life insurers already have to provide for those risks that are relevant to alternative life capital arrangements in the context of debt financing.

• Principle 4: Alternative life capital structures should predominantly result in capital relief, not balance sheet financing.
  • The PRA is keen to emphasise that the primary impact of any alternative life capital structure should be capital relief proportionate to the transfer of risk to a third party and not balance sheet financing. For example, the PRA does not intend to allow alternative life capital vehicles benefit from any illiquidity premium (i.e., a matching adjustment (MA)). The PRA states that replicating such arrangements would be impractical and might lead to regulatory arbitrage.
  • A key attraction of funded (asset intensive) reinsurance and reinsurance sidecars is to allow cedant insurers to benefit directly or indirectly from the investment management expertise of sophisticated asset managers. This principle limits the potential for UK life insurers to benefit from such expertise through an alternative life capital arrangement.
  • It is clear that the PRA sees the role of alternative life capital structures as providing investors with the opportunities to invest in risks that are thought to be “uncorrelated” to traditional investment risks, i.e., a combination of longevity risk, credit risk and equity risk, among others. However, these risks are by definition not as uncorrelated to traditional investment risks as those risks that investors in general insurance-linked securities invest in. Additionally, as the paper notes, while alternative capital in the general insurance sector has largely been focussed on providing protection for claims incurred, alternative life capital is likely to be focussed on reserve deterioration (through asset and longevity risks), which further complicates the investment from a capital provider perspective. Any undue limitation to how assets can be managed as part of an alternative life capital arrangement could also add further complexity, which will significantly reduce the attractiveness of those arrangements to investors.

• Principle 5: A level of risk retention by the insurer is necessary in any such structures and the UK insurer should only make limited use of alternative life capital structures.
  • The challenges UK life insurers have had raising capital have incentivised UK life insurers to favour capital-light business models.
  • The PRA views this trend towards what it refers to as an “originate to distribute model” as presenting a risk that UK life insurers will relax underwriting standards on the basis that they will be able to offload risk.
  • We agree that this is a sensible principle that ensures alignment of interests. UK life insurers should make use of alternative life capital structures as part of a broad risk mitigation strategy.

• Principle 6: The alternative life capital structures should not alter the control a UK cedant has over the management of its business.
  • The PRA expects UK life insurers to retain full control of the key operations of its business, including determination of surplus that can be extracted by investors.
  • While it makes sense that a UK life insurer should retain control over claims and the management of its business, it would be useful to understand the extent to which such measures might cut across any alternative capital arrangements.

What Is the Likely Shape of an Alternative Life Capital Arrangement?

The PRA does not express any clear preference for one form of alternative life capital arrangement over another. The PRA clearly states that it is open to considering all forms of alternative capital arrangements. The PRA has, however, helpfully set out how it is thinking about alternative life capital in sufficient detail so as to allow us to consider the likely shape of any new alternative life capital regime.

Examples Cited by the PRA

The PRA highlights three examples of risk transformation it considers to be instructive when considering alternative life capital, namely:

• Insurance linked securities (ILS) and the UK ISPV regime.
• Significant/synthetic risk transfers (SRTs).
• Life insurance sidecars and joint ventures.

The PRA notes that ISPVs have been widely used in the general insurance market, particularly for transferring catastrophe risk to capital markets through fully funded, subordinated structures, such as catastrophe bonds. However, the PRA believes that the current UK ISPV regime may not be well-suited to the long-term, complex risks associated with life insurance liabilities, such as annuities.¹ The PRA has previously stated that, unlike a traditional reinsurer, an ISPV does not benefit from diversification across a broader range of risks and portfolios of liabilities, and typically has a more limited set of management actions available to address deteriorating operating conditions. As a result, the PRA would not expect the transfer of annuity risk to an ISPV to lead to a reduction in the capital that a cedant is required to hold for these risks.² In the paper, the PRA also notes that the complexity of the arrangements, dynamic nature of the risks, duration of the contracts and impact on a cedant’s long-term capital position mean that a different form of authorisation may be required for longer-term liabilities.

The paper also considers in detail the experience of the banking sector with SRTs, which allow banks to transfer credit risk on portfolios to third-party investors, thereby freeing up regulatory capital. The PRA is interested in whether similar structures could be adapted for life insurance, provided that appropriate prudential safeguards are in place.

The paper’s consideration of life insurance sidecars and joint ventures is curiously brief. The PRA notes that life insurance sidecars are not currently a common feature of the UK life insurance market, while refraining from discussing why this might be. In our experience, the lead time for establishing and authorising a new UK life insurance company with MA permissions is a key impediment to the adoption of fully licensed life insurance sidecars in the UK — in conjunction with a lack of welcome for using UK ISPV and Bermuda structures.

Location of Assets

The PRA is likely to favour alternative life capital arrangements whereby assets remain on the cedant UK life insurer’s balance sheet. There are various reasons for this:

• Reduction in PRA regulatory burden. If assets remain on the balance sheet of the UK life insurer, the PRA does not need to supervise the ISPV or other vehicle to which risks are ceded as closely as it would if assets were transferred on a funds-transferred basis.
• Regulatory arbitrage. The PRA cites the potential regulatory arbitrage from investors obtaining additional investment flexibility from an ISPV structure as a key regulatory concern. If assets are retained by the cedant UK life insurer and solvency UK requirements remain unaltered, this risk is eliminated.
• Investment in UK productive assets. The PRA believes that alternative life capital can provide UK life insurers with sufficient space to develop their capacity to invest in UK productive assets and keeping assets on the UK life insurer’s balance sheet is a key factor in enabling that — obviously this invites the question as to whether the assets will need to be fully MA-compliant or not.
• Recapture. In the event of an early termination of the alternative life capital arrangement, the impact on the UK life insurer will be reduced, given the UK life insurer will have custody of the assets from inception of the alternative life capital arrangement.

Consistent with how the PRA has evaluated funded reinsurance transactions effected on a funds-withheld basis, we would expect that where the investor’s asset manager is managing assets as part of the alternative life capital arrangement, the PRA would focus particularly on the controls the cedant UK life insurer would have in place to oversee the investment manager’s activities. As discussed above, the PRA makes clear that, due to potential regulatory arbitrage and complexity, it is unlikely that a UK ISPV would be able to benefit from MA permissions. A funds-withheld structure would potentially allow the investor to benefit indirectly from the UK life insurer’s MA permissions.

We would also expect that the PRA’s preference would be for any collateral provided by the ISPV to be held in an account in the name of the UK life insurer and charged in favour of the ISPV.

Simplified Structures With Emphasis on Up-Front Capital 

The PRA cites the UK ISPV regime and SRTs as key examples of risk transformation arrangements. The UK ISPV regime requires that the ISPV’s liabilities are fully funded. Given the PRA has stated that alternative life capital arrangements should not assume recapitalisation, we expect that the PRA will insist that such arrangements are time-limited (on the basis of the arguments it has made) and fully funded.

Another key characteristic that both UK ISPVs and SRT risk transformation arrangements have in common is the emphasis on up-front authorisation, as opposed to ongoing supervision. We expect a similar profile of regulatory engagement from the PRA with respect to alternative life capital arrangements.

Focus on Risk Mitigation Impact

The PRA will likely require the UK life insurer to demonstrate to the PRA, on a continuous basis, the risk mitigation impact of the alternative life capital arrangement. Any time-limited alternative life capital arrangements will require the UK life insurer to hold sufficient capital to mitigate against any tail risk. Interestingly, the PRA mentions in the paper a pre-Solvency II “risk transfer principle” under which a UK life insurer was only able to take credit for reinsurance (and other risk mitigation techniques) if and to the extent that there was an effective transfer of risk from the firm to a third party. It will be interesting to see whether the PRA seeks to reintroduce pre-Solvency II principles to allow for alternative life capital arrangements to be more flexible.

Asset Management

The PRA sees the role of alternative life capital as more about enabling UK life insurers to build up their capacity to invest in UK productive assets and less about facilitating specialised asset managers in sourcing and managing long-dated assets to optimise the types and pricing of products UK life insurers can offer. Nonetheless, we can foresee asset managers participating in alternative life capital arrangements as part of broader transactions involving asset management arrangements in respect of associated assets.

Of course, this raises the question as to whether crowding life insurers even further into UK MA assets — and thus inflating their price beyond what would otherwise be their true market value — actually introduces systemic risk into the sector, as well as inflating the cost of bulk annuities, to the ultimate detriment of UK companies (acting as corporate sponsors of the schemes concerned) and their ability to invest productively. This would produce an outcome which is the exact opposite of their stated aim.

Impact on Funded Reinsurance

While the PRA expects a certain amount of funded reinsurance to remain part of UK life insurers’ risk and capital management strategies, any successful facilitation of new alternative life capital structures by the PRA will likely put additional pressure on UK life cedants seeking to effect funded reinsurance to justify the necessity for it. Such justifications may include the UK life insurer indirectly benefitting from the diversified nature of the life reinsurer’s business or the necessity to effect the transaction in order to facilitate new life insurance products. Again, there is a risk that the negativity over funded reinsurance introduces greater systemic risk as insurers will no longer be mutualising their risk between their UK reinsurers to the same extent.

Responding to Macroeconomic and Other Industrywide Conditions

The PRA’s approach to alternative life capital is likely to continue to be influenced by, and be reactive to, developments in the UK life insurance market and, more broadly, in the life insurance market globally, with the purpose of incentivising market participants to act in a manner which contributes towards the PRA achieving its primary and secondary objectives. In our view, it is reasonable to surmise that there may continue to be unintended consequences to the PRA’s well-intentioned regulatory interventions (such as “if you can’t reinsure it, buy it”). This may, in turn, lead to the PRA seeking to mitigate against those unintended consequences through further pronouncements and changes to the life insurance legal and regulatory framework.

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1 This is set out in the PRA’s Supervisory Statement SS2/25: “Prudential considerations for insurance and reinsurance undertakings when transferring risk to Special Purpose Vehicles”.

2 Ibid.

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