UK Life and Annuity market: What’s changed, what still matters and what’s next?

Deal-making remains vibrant

Over 150 buy-in/buy-out transactions closed in H1, predominantly at the small and mid-sized end of the market. This momentum reflects ample insurer capacity now targeting smaller schemes, resulting in a record number of total deals even as headline volumes dip. More insurers in the market have translated into increased bidding; XPS reports a rise in the average number of bidders per transaction in 2025, indicating intensifying competition for mid-market schemes.

The Prudential Regulation Authority (PRA) has reinforced its expectations for pricing discipline and sound risk governance considering this competition – its 2025 “Dear CEO” letter made clear that market share should not come at the expense of prudence.

Pension reforms unlocking surplus

New government pension reforms have the potential to give schemes more flexibility to “run on” independently, thanks to proposed rules to unlock surplus refunds at low dependency funding levels. The ability to distribute surplus without a full insurance buy-out has prompted certain sponsors to pause and consider an “own-run” endgame. Nonetheless, our research suggests that most small and mid-sized schemes are still expected to continue targeting buy-out in the near term.

What’s still true: The BPA market’s fundamentals remain strong

There is high demand for BPA from pension schemes and supportive economics for insurers. With new entrants joining the space, competition has increased, and incumbent insurers are under pressure to stand out via innovative deal structures, superior member service, and operational efficiency.

What’s shifted: The appetite for scheme “run-on” is rising

Trustees, emboldened by stronger funding positions and current gilt yields, are increasingly exploring run-on as a viable alternative to buy-out, which is likely to compress large-scale deal volumes going forward. A slower pipeline has led bigger players to compete more aggressively for mid-sized and even small schemes. This has intensified competition, particularly for deals under £250 million.

In response, insurers must deepen their value proposition with scheme trustees – for example, by offering flexibility on terms, tailored post-buyout services, and by demonstrating the operational sophistication and administration quality that come with economies of scale, e.g. delivering better member experience and financial security.

What’s emerging: Asset manager-led M&A and partnerships

Asset sourcing strategies for insurers are more important than ever to enable competitive pricing. This has been a key area of focus as highlighted by recent developments: Legal & General’s strategic partnership with Blackstone to access a broader private credit pipeline, and a wave of asset manager-led M&A activity. Notably, Athora’s £5.7 billion acquisition of Pension Insurance Corporation - backed by Apollo - and Brookfield’s £2.4 billion accepted bid for Just Group. Both transactions bring additional asset management firepower to support the growth and investment strategies of the acquired insurers.

Economic uncertainty and market volatility continue to pose challenges in 2025. The first half of the year has seen global financial jitters – from bond market swings to geopolitical flare-ups – reminding insurers that resilience is paramount. The PRA has accordingly tightened its oversight of capital and liquidity under stress.

Financial resilience

LIST 2025 was launched this year to assess the financial resilience of the UK’s largest life companies. For the first time, the PRA will publish solo entity results for the top eleven annuity writers (alongside industry aggregates) by Q4 2025. This unprecedented transparency is set to hold insurers accountable to the market for their risk management.

Regulatory initiatives

Other regulatory initiatives are coming to fruition. The PRA’s new liquidity reporting framework (Consultation Paper 19/24) is being finalised this year, and large life firms will soon need to file detailed cash-flow mismatch reports and maintain robust liquidity risk appetite. Insurers will need to focus on their liquidity buffers (e.g. holding more high-quality liquid assets) and refine contingency funding plans, especially considering the bond market volatility seen in late 2024 and early 2025. The PRA’s policy on solvent exit (finalised in December 2024) will come into force by mid-2026, requiring all insurers to maintain credible wind-down plans.

What’s still true: LIST 2025 will put a spotlight on balance sheet resilience

The decision to publish firm-specific results means insurers’ capital management and risk models will be subject to unprecedented public and market scrutiny. C-suites should be preparing now – to ensure there are no unwelcome surprises and to be ready to communicate their resilience to investors and policyholders.

What’s shifted: Liquidity risk frameworks are tightening

New regulatory reporting requirements for liquidity (due by the end of 2025) will enforce more frequent and granular monitoring of insurers’ cash-flow profiles. Boards are now paying closer attention to liquidity coverage ratios and ‘dash for cash’ scenarios, areas that were previously sometimes overlooked.

What’s emerging: Solvent exit planning has become a practical priority

Executive teams are now challenged to demonstrate how they could run off or transfer liabilities in an orderly way if ever needed – a stark reminder to prepare for extreme downside scenarios. Boards should be asking whether the firm’s risk controls, and capital buffers are sufficient for a range of severe (but plausible) shocks – from sharp credit downturns, to longevity spikes, to cyber-attacks.

What’s still true: The productive finance agenda remains a defining macro-policy theme

Solvency UK reforms have removed some, but not all, structural barriers to long-term investing and allow a broader range of assets to qualify for matching adjustment portfolios. The PRA remains cautious about any excesses. It has warned that even amid calls for growth, policyholder protection must remain paramount and solvency standards will not be compromised.

What’s shifted: Insurers continue to report difficulty sourcing scalable, investable UK projects that meet their return and risk criteria

The Association of British Insurers, through its Investment Delivery Forum, is working alongside HM Treasury’s new National Wealth Fund to expand the pipeline of investable UK opportunities. These collaborations aim to bridge the gap between the supply of long-term capital and the availability of suitable domestic projects.

What’s emerging: Insurers will increasingly look to partner with specialist asset managers and public-sector bodies to broaden their asset mix

Active industry forums and new tools (such as the government’s updated infrastructure project pipeline database) are being employed to identify opportunities. We also expect further regulatory initiatives – for example, the PRA’s proposed “Matching Adjustment Investment Accelerator” – to speed up approval of new asset classes for Matching Adjustment portfolios and support the productive finance agenda.

UK’s desire to be a leading risk transfer centre

One flagship proposal is the creation of a UK-based captive reinsurance regime to recapture risk transfer business currently flowing offshore. HM Treasury also launched a consultation to introduce a proportionate authorisation regime for captives – for example, by broadening the use of protected cell company structures – with the intent to “develop a captive insurance market in the UK” and cement the UK’s position as a leading risk transfer centre.

While directly written long-term life insurance is excluded, the reforms would still enable life insurers to write direct cover and use reinsurance captives to transfer risk which may allow firms to retain more risk onshore and improve capital efficiency.

Funded reinsurance model gathers pace with caution

The funded reinsurance model – where insurers reinsure annuity liabilities with external investors via collateralised arrangements – has grown to c10% of BPA volumes in recent years. This can be an effective tool for risk transfer and capital relief, but regulators have signalled caution. The Bank of England (BoE) has warned that if the use of funded reinsurance expands significantly, it could lead to undue counterparty and concentration risks for the sector. In July 2024, the PRA issued Supervisory Statement 5/24 on funded reinsurance, setting out expectations to shore up risk management and safeguard policyholder protection. The PRA has also included a scenario analysing the impact of a sudden loss of funded reinsurance cover and full recapture of the risk in its Life Insurance Stress Test (LIST) 2025.

What’s still true: Legacy IT systems remain a barrier to agility for many insurers

Even as front-end digital offerings improve, back-end core platforms (policy administration, claims, finance systems) can lag, limiting the speed and extent of transformation. Additionally, while IFRS 17accounting has now been implemented industry-wide, most insurers are still working to embed and automate these reporting processes into “business as usual” – which continues to strain actuarial and finance teams each quarter.

What’s shifted: There is a clear strategic shift from digital planning to digital doing

Insurers are no longer just talking about transformation – they are executing concrete projects with AI, data analytics, and cloud platforms to enhance performance. Crucially, the focus is now on measurable value: reducing unit costs, improving turnaround times, and boosting customer satisfaction metrics. We also see AI pilots being rapidly scaled across business units, moving from innovation labs into core operations and customer service.

What’s emerging: Digital transformation will only accelerate through 2025 and beyond

Areas like generative AI, advanced analytics, and ecosystem partnerships (InsurTech collaborations) are poised to become mainstream components of insurers’ operating models. In the coming 12 months, we expect to see more insurers appointing Chief Digital or Data Officers. The competitive gap will widen between carriers that successfully integrate new capabilities versus those that lag. This puts a premium on effective transformation governance – having a clear business case for each tech investment and strong execution oversight.

What’s still true: The principle of putting customers’ outcomes first is here to stay

The FCA has made clear that compliance is not a one-off project but an ongoing obligation. Many firms have already taken steps – revisiting fee structures, simplifying terms & conditions, and enhancing support for vulnerable customers – but the regulator expects continuous monitoring and refinement.

What’s shifted: Strategically, insurers need to move beyond tick-box compliance

Insurers should use the Consumer Duty as a catalyst to modernise their offerings and customer engagement. This means making tough decisions about legacy products: do they genuinely meet today’s customer needs, and if not, how can they be improved or phased out? Pricing strategies are being revisited to avoid any “loyalty penalties” for long-standing policyholders. There’s also a drive to invest in data and analytics to track real customer outcomes (e.g. persistency rates, claims paid ratios, complaints) and to demonstrate tangible improvements over time.

What’s emerging: Delivering good outcomes will drive competitive advantage

While operationally challenging – especially for older books and complex distribution chains – this shift is also an opportunity to rebuild trust in life insurance. The firms that can transparently show value for money (for example, through more flexible products, fair profit-sharing on with-profits funds, or enhanced guidance at retirement) will not only avoid regulatory sanction but may gain a competitive edge.

What’s still true: Climate transition planning has moved from a voluntary exercise to a regulatory expectation

Climate change mitigation is now firmly on the supervisory agenda alongside financial metrics. Insurers are expected to manage climate risks and opportunities with the same rigor as financial risks.

What’s shifted: Increasing focus on UK’s net-zero objectives

The Government has launched a consultation on proposed requirements for all UK insurers to publish Paris-aligned transition plans - essentially roadmaps showing how they intend to decarbonise their operations and investment portfolios by 2050. This follows Labour’s 2024 election manifesto commitment to mandate ‘credible transition plans that align with the 1.5°C goal of the Paris Climate Agreement.

What’s emerging: Regulators will look at how embedded ESG initiatives really are

The PRA has found that climate scenario analysis by insurers is often inconsistent and that governance of ESG risks can be patchy. We anticipate that ESG considerations will move firmly into internal audit and board risk committee remits over the next year. The new supervisory normal is one where financial and non-financial metrics alike are subject to challenge, and only a genuinely integrated approach will satisfy stakeholders.