PRA seeks feedback on potential for UK life ILS, including cat bonds and sidecars

The Prudential Regulation Authority (PRA) of the Bank of England has published a discussion paper to gather feedback on how the UK’s insurance special purpose vehicle (ISPV) or ILS structures can play a role towards bringing in alternative capital to support life risks and reinsurance in the UK.

As readers are aware, the UK ISPV structure has been developed to support insurance-linked securities (ILS) transactions such as catastrophe bonds, or collateralized reinsurance type arrangements.

The PRA indicated a while ago that this discussion paper was coming, as during her speech at the 30th Annual Bank of America Financials CEO Conference in London Vicky White of the PRA, highlighted how the regulator will work with industry and HMT on identifying alternative capital options which will consider how the ISPV framework (or other structures) could be made more accessible to UK life insurers.

Of course, these forms of alternative capital options includes both sidecars and catastrophe bonds.

It’s important to remember that the UK life insurance sector is one of the largest in the world, catering to a diverse array of policyholders at significant phases of their lives. This sector offers products such as long-term savings, protection against specific life events, and pension payments during retirement.

In a broader context, life insurance companies invest the funds of policyholders into the real economy by providing loans to corporations, infrastructure initiatives, or vital institutions. Consequently, access to capital is fundamental to all these operations.

The discussion paper reads: “The Prudential Regulation Authority (PRA) is committed to supporting sustainable growth in the UK economy. A thriving and innovative UK life insurance sector has a vital role to play in that aim. While the sector remains robust, feedback from market participants suggests that traditional sources of capital, such as listed equity and debt, are becoming less accessible or less attractive for some firms. This is particularly relevant for public listed insurers and mutuals, which can face constraints in raising new capital.

“This discussion paper (DP) sets out the PRA’s initial thinking and invites feedback on potential policy changes that could allow life insurers to transfer defined tranches of risk to the capital markets. The PRA is open to a range of innovative structures – including potential reforms to the Insurance Special Purpose Vehicle (ISPV) framework or approaches used successfully in other markets such as banking.”

Importantly, the PRA reminds readers that while it is not its role to direct market innovation and propose new solutions or structures, the regulator is interested in understanding where there are regulatory barriers to capital entering the sector and whether removing those barriers could advance its primary and secondary objectives.

The paper continues: “The PRA considers that access to third party capital could help life insurers in several ways. It could be used to provide additional capacity, to manage firms’ risk profiles or to enable product innovation. It could also support growth in the UK’s economy by allowing for a greater focus on long term investment.”

Providing some further background, the paper states: “His Majesty’s Treasury (HMT) has recently consulted on changes to the Risk Transformation Regulations (RTR). Changes to those regulations would be relevant for one potential approach to alternative life capital, namely insurance special purpose vehicles (ISPVs). ISPVs are entities through which insurers can transfer insurance risk to the capital markets. The UK has existing legal and regulatory frameworks which facilitate this activity. Looking beyond ISPVs, there are other approaches used domestically and in international markets which could also widen firms’ access to capital. Firms may also have other potential structures in mind, and the PRA welcomes feedback on those.”

Furthermore, these moves are all about positioning the United Kingdom to capture a larger share of ILS activity, while also making the regulatory regime useful to more of the country’s insurance and reinsurance industry as well.

The discussion paper is open until February 6, 2026, and the PRA encourages feedback on all the topics raised.

This discussion paper and call for industry feedback could also potentially inform a further consultation regarding any changes to regulations that may be required, as well as evaluating the applicability of the UK’s ILS regime to life insurers who are looking to diversify their sources of risk transfer and reinsurance capital.

Also read: 

– UK reforms enable “much faster turn-around time” of ISPV approvals: PRA.

– UK Gov confirms new cat bond, ISPV timelines. Launches new consultation to enhance ILS regime.

– UK ILS reforms more likely to take activity from other jurisdictions than generate net-new: Fitch.

– Bank of England to explore potential for UK ILS iSPV structure in life risks and FundedRe