Navigating risk in a rapidly evolving Bulk Purchase Annuity market
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Managing risk in a fast-changing BPA market
9 October 2025
The UK Bulk Purchase Annuity (BPA) market has experienced sustained growth, with intense competition for new business. This competitive landscape has attracted new entrants and driven innovation, but it has also intensified pressure on pricing, terms, and risk appetite.
As insurers expand their strategic ambitions - whether by entering the market, targeting larger transactions or introducing new products - and seek competitive advantages, their risk profiles evolve. To remain resilient, insurers must adapt their risk management frameworks to meet the demands of this dynamic environment.
Growth and competition are driving evolution in the BPA market
BPA insurers operate in a highly transactional and competitive market. Larger schemes, some exceeding £5 billion, can introduce significant concentrations of risk. New entrants face heightened exposure to unfamiliar transactional risks, while established players expanding their scope encounter fresh challenges.
Competitive pressures have increased the frequency of non-standard contractual features such as solvency-triggered termination rights (STTR), residual risk coverage and deferred premium structures. To maintain pricing competitiveness, insurers increasingly invest in illiquid assets and use reinsurance to transfer asset risks. These strategies, while effective in capital and price optimisation, introduce new counterparty and liquidity risks.
Regulatory scrutiny has intensified. Over the past year, the Prudential Regulation Authority (PRA) has issued guidance on Funded Re arrangements (SS5/24), Life insurance stress testing, Liquidity reporting (PS15/25) and STTR clauses (July 2025 Dear CRO letter). They continue to make announcements on these topics.
Competition and changing appetites are shifting risk profiles
Transactional risks
As insurers enter the market or pursue larger and more complex transactions, they face increased exposure to transactional risks, including:
- Mispricing and legal risk.
- Data quality issues.
- Uncertainty of benefit coverage.
- Execution and operational readiness risks.
Individual schemes may represent a substantial portion of an insurer’s balance sheet, amplifying entity-level sensitivity to these risks. An effective risk management framework will need to address these transactional risks.
Contractual risks
Competition is leading to increased use of non-standard terms, especially for larger schemes. Solvency-triggered termination rights (STTR), residual risk cover and deferred premiums are topical examples. STTR are contractual clauses requiring termination payment by the insurer in the event solvency falls below a specified level for a specified period. Termination may have adverse impacts on the characteristics of the insurer’s remaining asset portfolio e.g. liquidity, matching, duration or concentrations. There may also be operational difficulties executing the termination in times of stress and interaction with any Funded Re recapture needs to be considered.
Counterparty risk
BPA insurers often use Funded Re to reduce capital strain and optimise pricing. This gives rise to counterparty risk often to non-UK, credit asset-heavy reinsurers. Collateral is used to mitigate this risk but will not be fully effective due to the flexibility provided in the collateral agreements. Management actions assumed on reinsurer default may not be realistic or viable, especially in times of financial stress. A robust assessment of collateral effectiveness and residual counterparty exposure is essential.
Liquidity risk
With large balance sheets, asset optimisation provides a significant lever to improve pricing. This results in extensive investment in alternative assets, such as infrastructure debt, commercial mortgages and equity release mortgages, that provide higher returns due their lower liquidity. Derivatives are also frequently used to transform asset cashflows and may increase liquidity risk due to the volatility of the associated collateral.
Building a resilient risk management framework
To safeguard against these evolving risks, insurers must enhance their risk management frameworks across several dimensions:
| Risk appetite and limits | Define appetite and calibrate limits for transactional, contractual, counterparty, and liquidity risks reflecting the complexities discussed here. These should align with the firm’s overarching risk appetite, especially solvency risk appetite. |
| Enhance risk mitigation | Support, advise and challenge the first line in implementing specific mitigants such as:
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| Oversight of transactions | Clarify Risk Management’s role in transaction oversight, particularly for large or non-standard schemes. This includes:
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| Stress and scenario testing | Conduct stress tests to understand and assess impact of risks on key risk, capital/liquidity and profit metrics. Examine the risks discussed here e.g. transactional risks, solvency trigger termination, residual risk cover claim, reinsurer default, illiquid asset default, derivative collateral volatility. Consider correlations between these risks. Results can be used to inform new transaction oversight. |
What's next?
The BPA market continues to evolve, with recent acquisitions, product innovation, and regulatory developments. Insurers must ensure their risk management frameworks remain effective to navigate this complexity. Proactive oversight, strategic stress testing, and disciplined governance will be critical to sustaining resilience and competitive advantage.
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