On 14 November 2025 the Prudential Regulation Authority (PRA) published a discussion paper on “Alternative Life Capital: Supporting innovation in the life insurance sector”. Through this discussion paper, the PRA is inviting views from across the industry on how UK life insurers might access alternative forms of capital that do not stem from direct issuance equity or debt.
Against the backdrop of shifting market dynamics and increasing complexity in capital-raising, the PRA’s discussion paper prompts timely strategic reflection by insurers, investors, and industry partners on how best to adapt and capitalise on regulatory change.
Capital challenges in the UK life sector
While the UK life insurance industry maintains a strong solvency position, many insurers face persistent challenges in raising new capital. Public equity markets are proving less attractive for further rights issues and listed insurers contend with high dividend yields and higher equity costs. In turn, there is greater reliance on “capital-light” product strategies, a trend toward simplification of business portfolios, and increased use of reinsurance and strategic international partnerships.
These developments underscore an underlying mismatch between the capital needs of insurers, who bear long-term liabilities, and the preferences of “traditional” capital providers, whose horizons may be shorter-term or more volatile.
Patient capital
The PRA discusses “patient capital” as an important concept in the context of life insurance funding. The PRA suggests that obstacles to growth, product development, and sector stability could result from a misalignment between the desired investment horizon of insurers and the preferences of traditional capital markets. Investors often seek rapid, stable returns, while insurance businesses require partners willing to tolerate short-term volatility for the promise of larger, long-term gains.
So, what makes for patient capital?
- It matches the long-term time horizon of insurance liabilities.
- Investors are prepared to wait for more substantial returns over time, rather than demanding immediate payouts.
- The capital allows higher yielding UK productive investments to be developed over time, rather than seeking assets already originated by others in global markets.
- It facilitates reinvestment in growth while avoiding concentration of counterparty risks.
Importantly, the PRA does not limit patient capital to any one investor class, and invites market views on which alternative models or strategies might allow UK insurers to tap into it.
The PRA highlights several practical benefits of flexible capital. With the right investor partners, insurers could make longer-term investments for better returns, diversify and share longevity or credit risk, structure bulk annuity deals with external capital, and open up new product innovation, especially important for mutuals and the evolving needs of an ageing population. The PRA is inviting feedback on these trends, asking stakeholders to identify where capital constraints exist, how more flexible models could help, and what features alternative capital should offer for both insurers and investors.
Risk transformation vehicles
In its discussion paper, the PRA explores diverse frameworks from other markets that could, with appropriate adaptation, offer new options to UK life insurers. For example, the use of insurance-linked securities (ILS) and special purpose vehicles (SPVs) is well-established in property and casualty insurance, enabling the transfer of defined short-term risks to capital markets.
The PRA acknowledges that the direct transfer of these approaches into the life sector is far from straightforward, due to the complex and long-term nature of life and annuity liabilities. Similarly, the significant risk transfer (SRT) model from banking (allowing credit risk to be transferred synthetically) offers some insights, but would need careful tailoring for life insurance applications.
Internationally, there has been increasing interest in the use of “sidecars” and joint venture arrangements as alternative structures for accessing external capital in the insurance industry. A sidecar typically enables third-party investors to participate in a dedicated vehicle that assumes a portion of an insurer’s risk, such as a specified book of annuity, longevity, or mortality risks. In a similar vein, joint ventures allow insurers and investors to share both risk and reward in targeted segments of the insurer’s business, combining institutional expertise and funding capacity.
The PRA notes that, while these structures have seen broader use in other jurisdictions, they have begun to emerge in the UK as well, particularly in response to the country’s fast-growing bulk annuity market and growing demand for complex longevity risk management solutions. Sidecars, for example, are often employed to attract international investor capital, which can be used to fund capital-intensive transactions or to support the transfer of longevity and demographic risk. The sponsoring insurer retains operational responsibility and utilises its existing investment and modelling capabilities, while the external investor gains exposure to insurance risks that are often uncorrelated with traditional financial markets.
The International Association of Insurance Supervisors (IAIS) has observed that these vehicles are designed to be long-term in nature, which aligns with the underlying duration of life insurance liabilities. This makes them particularly attractive for insurers seeking to diversify their risk transfer options beyond the traditional reinsurance market, especially for large-scale asset-intensive reinsurance transactions related to bulk annuities or pension risk transfers.
While life reinsurance sidecars and similar structures are not yet a prominent feature of the UK life market, the PRA identifies them as a promising means of attracting outside capital, fostering innovation, and supporting the industry’s ability to serve policyholders’ long-term needs. The discussion paper actively encourages stakeholders to share their experiences with such models and to comment on any challenges or regulatory considerations that may need to be addressed for their successful implementation in the UK context.
Key Regulatory and Prudential Considerations
The PRA’s emerging thinking reflects a pro-innovation stance, but it maintains a clear focus on prudential soundness.
Uphold robust capital standards
Any creative way of bringing in new investment must not result in insurers lowering the overall quality or amount of the capital that backs policyholder liabilities. Swapping in new capital sources cannot be a route to weaken the underlying safety net for policyholders and the wider financial system.
Limits must be clearly set
Alternative structures will only work if the boundaries, both in size and duration, are clear. For example, where traditional reinsurance might provide cover indefinitely and for the full amount of losses, arrangements using capital market investors need to be time-limited and contractually-bound. This ensures there’s no unrealistic expectation that these vehicles will be constantly recapitalised or will offer open-ended protection.
Management of tail and residual risk
Insurers must retain responsibility for any exposures left outside the structure, establishing safeguards where the capital only partially covers potential losses.
Maintain meaningful risk retention
Insurers should keep a substantive share of risks themselves, applying alternative capital only to certain segments of their portfolio.
Retain ultimate business control
Insurers must remain in charge of core operations and governance, particularly investments and policyholder management, even when third-party capital is involved.
Operational implications for market participants
The PRA’s discussion paper initiates an important discussion on the future of capital in the UK life insurance sector, laying a roadmap for building alternative funding solutions that support innovation, protect policyholders, and keep UK life insurance secure for the long run. For investors, the evolution of this market presents opportunities for diversification and long-term exposure to UK insurance risk, however, achieving the right balance between innovation and prudential oversight will underpin the sustainable evolution of the market.
The PRA has invited stakeholder feedback until February 2026 and is seeking informed commentary on both commercial and technical dimensions of regulatory reform. Life insurers, investors, and intermediaries with a stake in sector development may wish to contribute their perspectives to inform the PRA’s next steps.
Freshfields regularly advises on the structuring, regulation, and execution of complex insurance and capital markets transactions. Please contact our team should you wish to discuss these developments or consider engaging with the PRA’s consultation.
