A reliance on third-party capacity The second area is the use of third-party capital and asset origination capacity, known as funded reinsurance, to support these large new business transactions that are both capital-intensive and put a strain on in house asset origination capabilities. In principle, attracting new capital to support BPA liabilities is positive – so long as the capital is aligned with the long-term risks it is intended to support. I spoke in September[11] on the emerging appetite for funded reinsurance to support new BPA business and the resulting counterparty risk. I explained that we would be engaging with insurers and other stakeholders to enhance our understanding of these risks and the most appropriate ways to address them. Our work so far has focussed on the evolving contract and collateral structuring, the counterparty risk management frameworks, internal model approaches and firms’ stress and scenario testing. Page 5  We are exploring these aspects carefully and are increasingly focussed on four key elements: 1. Recapture events: We have looked at the circumstances under which the risks that insurers have ceded might end up back on their own balance sheets. Default of the reinsurer is only one of them. Voluntary and automatic contractual termination triggers linked to solvency coverage ratios, credit ratings, or legal and regulatory environments bring material uncertainty to the recapture triggers. 2. Wrong way risk: We have observed the emergence of reinsurers with newer business models narrowly focused on credit markets where diversification benefits might be less evident[12].

More broadly, the long-term implications for the UK economy of these arrangements bear examination. Within the objectives of the Solvency II reforms, it is not clear that the incentives of third-party capital providers are aligned with UK insurers’ role in making investments in UK based long-term infrastructure and productive assets. Both the PRA and insurers need to think about the opportunity cost of funded reinsurance – in terms of UK direct investments foregone – as well as the benefits and risks. Greater interconnectivity with wider financial markets Related to that point, the third area I would like to touch on is a key aspect of the changing  Page 6  pensions and insurance landscape. One industry estimate, suggests that the UK life insurance industry could onboard more than £ of pension liabilities – and associated assets – over the coming decade[13] [14]. This is a big structural change in the control of long-term investments in the UK, and the decisions that insurers make now will have long term consequences for the performance and development of the broader economy. In line with the Government’s objectives for Solvency II reform, insurers’ investment strategies have an important role in supporting sectors that require certainty of funding over the long term, including education, social housing and infrastructure, and where financing the transition to net zero such as via renewable energy infrastructure and technologies requires patient and deliberate commitment. Making such investments can also generate a competitive advantage in a market where ESG credentials are increasingly valued by trustees[15].