Staying ahead of the curve: Adapting to new BPA risk realities

At a glance

The evolving Bulk Purchase Annuity (“BPA”) market demands enhanced risk management. This is driven by record transaction volumes, greater competition and innovation, the increasing use of complex investment strategies and risk mitigation/transfer techniques and heightened regulatory scrutiny and expectations. In summary:

• Firms need to adapt their risk management frameworks to address the evolving BPA market, incorporating new investment opportunities and the latest regulatory developments, such as the introduction of Solvency UK (“SUK”).
• Robust risk identification, particularly for non-traditional and illiquid assets, is crucial for effective capital modelling, meeting Matching Adjustment (“MA”) attestation requirements, and complying with the Prudent Person Principle (“PPP”).
• The liability-driven investment (“LDI”) crisis highlighted the importance of robust liquidity risk management frameworks, including considerations around solvency-triggered¹ termination rights, and the need for timely and effective recovery actions (CP19/24²).
• New regulations on Funded Re (SS5/24³) require firms to enhance their risk management practices, particularly around investment limits, collateral policies, recapture plans and onboarding processes.
• The recently released CP7/25⁴ on Matching Adjustment Investment Accelerator (“MAIA”) introduces a new process for firms to include assets with new features in their MA portfolios without prior PRA approval, subject to certain conditions and exposure limits.

Firms must proactively adapt and enhance their approaches to these evolving requirements.

Who this blog is for

Board and risk function members, senior executives, actuaries, and risk management practitioners working for insurers who are operating in or looking to enter the UK BPA market.

Importance of Risk Management in the BPA Market

In today’s competitive BPA market, robust risk management is crucial as firms leverage illiquid asset expertise to pursue higher yields through investments in illiquid and internally rated assets. This, combined with record transaction volumes of c.£50 bn expected again this year and the growing use of Funded Re, has intensified regulatory scrutiny.

However, the focus on risk management within the BPA market isn’t solely regulatory. Market innovation necessitates firms driving their own risk management agenda, proactively adapting processes to identify, monitor and manage both existing and emerging risks. This proactive approach, anticipating change in this dynamic landscape, protects financial stability, builds reputation, and ultimately attracts positive regulatory attention.

In this blog, we delve into some key areas where firms' risk management practices may need to adapt or develop.

Credit risk

The SUK regime, coupled with the consultation paper on MAIA framework (CP7/25), presents both opportunities and challenges for BPA firms managing credit risk. SUK introduces greater investment flexibility, allowing for assets with highly predictable (rather than fixed) cashflows and potentially lower credit ratings (i.e., sub-investment grade assets that are no longer subject to penal MA haircuts). Meanwhile, MAIA provides a new process for accessing MA benefits on assets without the prior approval from the PRA, subject to certain conditions and exposure limits.

This section explores the key challenges and considerations for firms navigating this evolving credit risk landscape.

Adapting Risk Management Frameworks

As firms reassess their investment strategy and objectives to take advantage of these new opportunities, it is imperative that their risk management frameworks keep pace. In particular, firms will need to:

• Develop robust risk identification capabilities: Firms will need to have the capabilities to identify, measure, monitor, manage, control and report risks associated with these new assets. This will not be straightforward as new assets, by definition, lack the data history to easily support risk identification and will require appropriate expertise to set expert judgement to calibrate risks. This is also key to the new MA attestation requirements introduced by SUK, robust capital modelling and for demonstrating the eligibility of MAIA assets.
• Ensure continued compliance with the PPP: Investment in new asset classes is coupled with compliance with the PPP. Firms will need to ensure that any new risks or increased risk exposures introduced by new assets can be integrated into the risk identification framework described above. Firms should also be able to articulate how such assets fit into their wider investment strategy and overall risk appetite.

Contingency planning for MAIA Assets

MAIA also introduces the requirement for firms to establish contingency plans in case assets are not ultimately approved by the PRA. These plans must address the capital and liquidity impacts of removing assets from the MA portfolio and losing the associated MA benefit. While the limits on MAIA are designed to prevent material impacts on solvency and liquidity, firms must still plan for this possibility. Therefore, prioritising robust, proactive risk management is the most crucial mitigating factor.

Reviewing Quantitative Asset Risk Limits

Where a firm decides to adapt its investment strategy, it should also be critically reviewing its quantitative asset risk limits, considering the potential impact of MAIA assets on its portfolio concentration and risk profile. Firms should be asking themselves:

1. Are our risk limits still fit for purpose or are they outdated given the broader investment universe?
2. Do our risk limits effectively manage complexity? Can they handle the nuances of new asset classes and prevent excessive concentration?
3. Are our risk limits aligned with our risk appetite? Do they strike the right balance between risk and return in the context of the new investment strategy?
4. Do our risk limits prevent yield-chasing? Will they stop asset managers from prioritising returns over credit quality?

Managing Internally Rated Assets

As firms’ exposures to internally rated assets have increased, and will potentially be accelerated further by the MAIA, this has drawn increased regulatory attention. The updated SS3/17 now sets out the PRA’s requirements on internal ratings, rather than just expectations. Firms must demonstrate the robustness of their internal rating processes, including governance, model validation and ongoing monitoring to ensure compliance and to maintain confidence in their internal ratings.

Onboarding New Schemes with Illiquid Assets

Finally, firms must carefully consider their risk appetite when onboarding new schemes with significant illiquid asset holdings, especially when using the MAIA to include such assets within their MA portfolios. Aligning the acceptance of these assets with the firm’s overall risk appetite and ensuring they serve a strategic purpose beyond MA eligibility remains crucial.

Hedging

Effective Asset Liability Management (“ALM”) is important for BPA providers, impacting areas like pricing and hedging effectiveness. Strong ALM requires close co-ordination between various processes and teams, including robust feedback loops to ensure pricing reflects plausible reinvestment rates and effective hedging strategies. Hedging plays a vital role in ALM and overall risk management, but its impact on liquidity risk requires careful consideration, especially given the regulatory focus on liquidity in the wake of the LDI crisis.

BPA providers use hedging instruments to mitigate inflation, currency, and residual interest rate risk within their MA portfolios. Firms must choose their hedging metric (for example, the Solvency II capital position or IFRS earnings, or somewhere in between), recognising potential trade-offs and volatility implications. Other factors such as liquidity metrics, dividend paying capacity and risk appetite may be considered when setting hedging objectives. We observe that the majority of firms continue to hedge on a Solvency II basis, resulting in potential volatility in IFRS earnings requiring a clear investor communication strategy.

Firms should ensure they are able to monitor their hedge effectiveness and investigate unexpected hedging losses as well as profits. Appropriate and timely hedging management information (“MI”) is required both to maintain and monitor hedge effectiveness. However, this may be difficult at precisely the times it is most needed. For a number of firms, producing an accurate profit and loss attribution in periods of high market volatility and stressed liquidity conditions remains challenging. Unexpected outcomes, even favourable ones, can expose weaknesses in exposure understanding and/or robustness of hedging models. Firms must therefore ensure their models remain fit for purpose and respond appropriately to changes in market conditions.

Market events underscore the importance of robust, long-term hedging and investment strategies for BPA firms. It is therefore crucial to avoid knee-jerk reactions and maintain a long-term strategic approach to hedging rather than locking in losses at market lows. Firms should carefully consider the potential trajectory of market recovery and its implications for their hedging positions and investment strategies before making significant adjustments.

Liquidity Risk

Liquidity risk for BPA firms, primarily stemming from collateral calls on hedging instruments, is under increased regulatory scrutiny following the LDI crisis. The PRA has since proposed new liquidity reporting requirements in CP19/24 (final guidance expected in Q3 2025 with implementation in the second half of 2026) which are intended to enhance firms’ liquidity risk management capabilities.

While the new liquidity reporting templates are seen as a positive step by some firms, challenges remain:

• Interpretation of requirements: Firms seek clearer guidance on the new templates, particularly around specific instructions, the level of granularity required (e.g., segmental vs. entity), materiality and thresholds, and the interpretation of specific items within the templates. Without further guidance or FAQs, interpretations may diverge from the PRA's intentions and/or market practice.
• Data quality and availability: Retrieving historical data for the cash flow mismatch template is challenging, often limited by system constraints. Data quality issues drive significant exception handling, impacting downstream processing and review.
• Implementation timing and resource: The tight deadline leaves limited implementation time. Many firms are adopting tactical "no-regrets" approaches, delaying strategic solutions. Resource constraints are exacerbated by the overlapping implementation of other regulatory initiatives.
• Reporting timelines: Firms are concerned about the limited review time for external reporting, especially during stressed market conditions when daily updates are often required.

The LDI crisis served as a real-world test of liquidity risk management frameworks and recovery actions. Testing the monitoring, escalation and recovery actions in a live stress scenario provided useful insight into firms’ frameworks and recovery plans. For some firms, it provided evidence that their monitoring and recovery actions worked in practice in stress. However, for others it highlighted weaknesses in, for example, the appropriateness and timeliness of liquidity MI (which CP19/24 is designed to address) or the effectiveness of management actions and timescales in which management actions could be deployed.

Firms should have reflected the learnings from the LDI crisis in their liquidity risk frameworks already but should not become complacent. Indeed, almost three years on from the crisis, liquidity risk remains a key focus for the PRA as highlighted above and in our previous blog Emerging regulation for life insurers: model, credit and liquidity risk on the rise | Deloitte UK⁵.

Adding another layer of complexity are solvency triggered termination rights. As highlighted by Gareth Truran’s speech⁶ at the 22nd Westminster and City Annual Bulk Annuities Conference, these rights introduce additional risk management considerations, potentially creating sudden liquidity outflows. The PRA expects firms to proactively manage these risks, ensuring robust liquidity frameworks and appropriate exposure limits. Mitigating this risk can include incorporating greater contractual discretion over termination payment terms for increased flexibility in managing potential outflows, such as negotiating more control over timing and composition of payments.

Funded Re

Funded Re has become increasingly popular as a capital management tool to support BPA deals, especially in the context of larger transactions. However, it remains a prominent area of focus for the PRA, following the issuance of SS5/24 in 2024 and firms’ completion of self-assessments. This continued emphasis is apparent in both the 2025 Insurance Priorities letter⁷ and Gareth Truran’s speech, signalling that the PRA's concerns persist regardless of the implementation of initial regulatory measures. The PRA’s view is that, based on these self-assessments, insurers are not yet fully meeting its supervisory expectations. The PRA leaves open the possibility that further policy action may be taken to address the risks it has identified.

A key concern highlighted in both the 2025 Insurance Priorities letter and Gareth Truran’s speech is the robustness of firms’ risk management frameworks, especially the setting of appropriate investment limits. These limits should encompass not only credit rating but also considerations such as the regulatory regime of the reinsurer and the potential implications of recapture.

Beyond limits, the PRA expects firms to have detailed, board-approved recapture plans that demonstrate their ability to withstand single or multiple recapture events, manage counterparty defaults and ensure continuity of coverage. Collateral adequacy and its continued MA eligibility in a recapture scenario, particularly for illiquid assets, remains a significant concern. Firms should carefully review their collateral arrangements and consider renegotiation or alternative risk mitigation strategies.

Upcoming public disclosures under the Life Insurance Stress Test 2025 (“LIST 25”), which includes a funded reinsurance recapture scenario, underscores the need for firms to assess the impact of stressed market conditions on collateral valuations and reinsurers’ ability to fulfil their obligations.

Conclusion

The UK BPA market is booming, but not without its challenges. The PRA is laser-focused on risk management, and firms will need to remain agile in improving and maintaining strong risk management discipline across all business functions.

This includes enhancing risk identification, particularly for non-traditional assets, leveraging expert judgement and advanced modelling capabilities. Firms must also learn from the LDI crisis, strengthening liquidity risk frameworks and addressing CP19/24's reporting challenges. Mastering Funded Re risks requires comprehensive frameworks covering investment limits, collateral, and recapture planning. Navigating MAIA effectively will require robust risk assessments, contingency plans, and aligned investment strategies. Finally, consideration should be given to the skillsets of internal resources, and whether external expertise is required to secure specialised knowledge and support resource management.

The BPA market is a dynamic space that rewards adaptability; proactive risk management is crucial for thriving in this evolving landscape.

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References:

1. Overseeing BPA growth safely - Speech by Gareth Truran | Bank of England
2. CP19/24 – Closing liquidity reporting gaps and streamlining Standard Formula reporting | Bank of England
3. SS5/24 – Funded reinsurance | Bank of England
4. CP7/25 – Matching Adjustment Investment Accelerator | Bank of England
5. Emerging regulation for life insurers: model, credit and liquidity risk on the rise | Deloitte UK
6. Overseeing BPA growth safely - Speech by Gareth Truran | Bank of England
7. Insurance Supervision: 2025 priorities