The UK and Japan are taking different regulatory approaches to funded reinsurance, but regulators in both markets increasingly expect firms to demonstrate control over the same fundamental risks. Future success may depend on transparent, well-capitalized counterparties that can demonstrate sound risk transfer.
As with most road trips, there is more than one way to get from London to Edinburgh. Both the M1 and A1 will take you to the same destination, though the junctions arrive in a different order, traffic varies, and every driver has an opinion about which is best.
Listen to recent headlines about funded reinsurance (funded re), more commonly described in Japan as asset-intensive reinsurance, and it is easy to conclude that the UK and Japan have split onto two roads heading in opposite directions. This narrative asserts that the UK’s funded re market is dying while Japan’s is set to continue its rapid expansion.
It is a tidy narrative. It is also probably too simplistic and overhyped.
Regulators in the two markets have taken broadly similar approaches to addressing perceived risks. The UK is now considering regulations that would make funded re more expensive and potentially push the two markets further apart economically.
But while the two countries may apply different regulatory tools, they are increasingly asking firms to demonstrate the same things. Seen through this lens, the story is less about two roads diverging in opposite directions and more about two different paths converging into similar regulatory expectations.
The UK and Japan represent two of the largest life reinsurance and insurance markets in the world. Yet, for all the attention funded re receives, it remains a relatively small part of each.
In the UK, funded re primarily supports the bulk purchase annuity (BPA) market. It helps insurers manage capital efficiently, support growth, and improve competitiveness when bidding for pension risk transfer (PRT) transactions. Rather than operating as a standalone business line, it has become a pricing and balance sheet management tool.
That creates a natural constraint. Because funded re activity is closely tied to BPA transactions, its long-term growth potential is linked to the size of the BPA market. Before the current regulatory debate, annual funded re volumes remained meaningful, but growth stalled as BPA transaction volumes hit capacity limits, leading some observers to argue that the funded market had peaked in annual volumes.
There is also limited evidence that SS5/24 materially changed the behavior of sophisticated market participants. Many active users had already implemented rigorous governance, collateral oversight, stress testing, and recapture planning frameworks before the guidance was introduced. SS5/24 therefore appears to have brought greater consistency across the market – a valuable outcome to effectively manage systemic risk – but it did not fundamentally change how experienced insurers approach funded re transactions.
Recent stress testing offers additional, although necessarily limited, evidence of resilience. The Prudential Regulation Authority’s 2025 Life Insurance Stress Test (LIST) included a significant funded re recapture scenario in which participating firms remained resilient. That result is reassuring, but it does not resolve every question about contagion, market-wide operational capacity, or the performance of individual structures under different stresses.
Japan’s recent expansion has been driven partly by the introduction of the nation’s economic value-based solvency regime, J-ICS. Many Japanese insurers entered the new regime with large legacy books containing long-term guarantees. J-ICS brought greater visibility to the interest-rate risks embedded within those portfolios, increasing interest in funded re as a balance sheet management tool.
However, it is harder to support the assumption that Japan’s recent growth trajectory will continue indefinitely. Block coinsurance has been significant in recent years, but flow coinsurance has been larger. Insurers seeking to optimize existing back-book business drove much of the initial acceleration in block transactions, and many of those opportunities have already been addressed. In addition, rising interest rates have slowed demand for these products.
This does not mean that the Japanese market has reached a fixed ceiling. Japanese insurers often use flow coinsurance for savings products, leveraging reinsurers’ investment capabilities to offer attractive yields to policyholders. These are typically USD- or JPY-denominated single-premium products sold through the bancassurance channel, with investment periods of five to 10 years. Such transactions can provide material J-ICS benefits, but insurers’ motivations extend beyond capital and regulatory considerations alone. Future growth could come from further flow arrangements, product innovation, or wider use of reinsurance as a strategic balance sheet tool.
Japan’s aging population continues to support demand for retirement and savings products, creating an ongoing need for long-duration asset-management solutions. Funded re may help insurers support product development, improve customer propositions, and manage capital efficiently. However, insurers also have other options, including product redesign, asset-liability management, hedging, and alternative forms of risk transfer.
The implication is not necessarily that Japanese growth will stop. Rather, the market could enter a period of steadier growth.
Despite their differences, both markets tell a similar underlying story.
The UK market may remain linked closely to BPA activity, while Japan could develop through a broader combination of back-book optimization and new-business flow. These differences could produce distinct volume, pricing, and competitive outcomes.
In both markets, however, regulatory attention is shifting toward transaction complexity and the quality of execution.
The case for diverging roads starts with a comparison between the UK PRA’s CP8/26 proposals and the Japanese Financial Services Agency’s (JFSA) Supervisory Guidelines.
That comparison is useful when discussing transaction economics. CP8/26 would make funded re more expensive in the UK by requiring insurers to hold more capital against risks retained after a transaction. If implemented as proposed, it would place downward pressure on parts of the UK funded re market relative to Japan.
But a second comparison is useful when examining regulatory intent. Comparing Japan’s Supervisory Guidelines with the PRA’s earlier SS5/24 framework reveals substantial common ground.
Both frameworks address transactions as they become more bespoke and interconnected. Both ask whether firms understand the risks they are transferring and whether those risks would remain manageable during stress.
The comparison therefore depends on the question being asked. CP8/26 and Japan’s guidance reveal important differences in transaction economics and capital treatment. SS5/24 and Japan’s guidance reveal similarities in the underlying risks that regulators expect firms to manage.
Historically, some firms treated funded re almost as an asset trade with a highly rated reinsurer attached. Both regulators challenge this mindset.
The expectation now is that boards should understand not only who the reinsurer is but how the relationship and the reinsurer’s wider business model might behave during market stress.
SS5/24 explicitly raises concerns about the potential underestimation of counterparty risk because of the complexity of arrangements and uncertainty surrounding management actions in stress. The Japanese regulator places particular emphasis on understanding the reinsurer and establishing an appropriate alignment of interests between insurer and reinsurer.
Ten years ago, the principal question might have been: Is the deal collateralized? Today, both UK and Japanese regulators are asking a more demanding question: What happens to the collateral when it is actually needed?
A collateral package may appear reassuring while markets are calm. But if liquidity disappears, credit spreads widen, and assets need to be realized quickly, will the collateral still provide the protection assumed when the deal was executed?
Regulators increasingly expect firms to test recoverability rather than simply record collateral values on a spreadsheet. This represents a clear area of alignment between the two markets.
The PRA and JFSA are also aligned on the importance of credible recapture planning. Each is effectively saying: Do not merely tell us recapture works; show us how it does.
The operational questions are remarkably similar:
Japan’s guidelines require insurers to consider simultaneous recaptures and reinsurer failures across multiple counterparties. This presents a demanding test for dealmakers. While the scope and design differ from the PRA’s LIST exercise, the underlying regulatory expectation is similar: recapture must be operationally credible, not merely contractually possible.
Running through all these themes is a broader concern about risk management and concentration.
Individually, each transaction can appear prudent and well managed. Collectively, risks may accumulate if many cedants rely on the same counterparties, collateral types, custodians, asset managers, investment strategies, or contractual mechanisms.
At that point, apparently diversified firm-level exposures can become system-level danger.
Counterparty strength and systemic concentration should therefore be treated as related but distinct questions. A financially strong and diversified reinsurer may actually reduce certain forms of credit and wrong-way risk.
Both regulators arrive at a broadly similar point: Funded re is an important part of the market, but firms using it must understand their counterparties, assess the resilience of collateral, plan for recapture, and demonstrate genuine risk transfer.
SS5/24 and Japan’s Supervisory Guidelines focus substantially on demonstrating that transactions can operate safely. In practice, the distinction is less about whether residual risks should carry capital consequences and more about how heavily those consequences are calibrated. Japan’s framework already incorporates capital requirements that reflect factors such as duration, reinsurer credit quality, and collateral characteristics. In that sense, both jurisdictions recognize that residual risks matter. The more significant distinction may therefore be the magnitude of the capital impact under CP8/26, which could make the economic consequences of those residual risks more pronounced in the UK.
That difference in calibration is not trivial. Capital treatment can materially affect transaction economics, limit which structures remain attractive, and influence which counterparties continue to participate.
CP8/26 does a good job of distinguishing among different collateral structures and recognizing that collateral quality affects residual risk. It gives less consideration, however, to differences among the business models and risk profiles of reinsurers.
Supporters of the framework might argue that this reflects a deliberate preference for simplicity and consistency over more subjective counterparty-specific assessments. But if implemented as proposed, CP8/26 would make the economics of UK funded re less attractive. Whether that outcome appropriately reflects the underlying risks remains open to debate.
For example, a globally diversified reinsurer with significant biometric and geographic diversification may present a different risk profile than a more concentrated counterparty. Under CP8/26, demonstrably sound funded re could receive treatment similar to structures carrying materially different underlying risks.
The challenge is to recognize meaningful counterparty differences without sacrificing supervisory simplicity, consistency, and comparability. Any counterparty-sensitive treatment would need transparent and measurable criteria rather than broad labels such as “high quality” or “diversified.”
Allowing carefully calibrated positive or negative notching based on demonstrable counterparty characteristics could introduce greater risk sensitivity. Relevant considerations might include diversification, capitalization, exposure to similar underlying risks, and behavior under stress.
Such an approach would involve tradeoffs. A more tailored framework could better reflect counterparty risk but would also introduce complexity, supervisory judgment, and the potential for inconsistent application. The objective should be targeted refinement rather than firm-specific treatment or wholesale redesign.
Even if CP8/26 ultimately makes funded re less economical in the UK, that does not necessarily imply a shrinking market. There is still value for funded re for its current use case, provided the counterparty and collateral structures are of high enough quality. Further, if funded re can support a broader range of products beyond BPA, particularly where customer benefits are more visible, the market may find new avenues of growth while supporting the needs of policyholders, which can only be considered a good thing for the market.
Simply because two markets are on different roads does not mean they are moving toward fundamentally different destinations.
The UK and Japan may not reach identical outcomes. Their capital frameworks, product markets, sources of demand, and regulatory tools remain distinct. Those differences could shape volumes, transaction structures, pricing, and market participation.
Beyond the attention-grabbing headlines, however, the more notable story may be the extent to which regulators in both markets are asking firms to demonstrate control over the same core risks.
If regulatory scrutiny continues along its current path, both markets may increasingly favor reinsurers that can demonstrate strong capitalization, transparency, collateral resilience, credible recapture planning, alignment of interests, and competitive pricing.
The roads remain different. The questions regulators are asking increasingly are not.
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