Swiss Re finds reinsurance reduces solvency capital and enhances liquidity for UK life insurers

According to Swiss Re, the global reinsurer, insurers can use reinsurance strategically to improve balance sheet efficiency and manage liquidity in response to ongoing market volatility.

Swiss Re observes that in 2025, UK life insurers face pressures from foreign exchange exposures, inflation-linked liabilities, and the widening spread between gilt yields and swap rates, while IFRS losses remain a concern due to marked-to-market investment and derivative positions.

The reinsurer highlights that Bulk Purchase Annuity providers holding non-GBP assets must hedge currency risk with long-dated cross-currency swaps, which often require liquid collateral and can limit portfolio yields.

Inflation-linked liabilities increase complexity, as insurers must manage exposure through inflation swaps or government bonds, while derivative fluctuations may trigger additional collateral calls.

Swiss Re also notes that gilt-swap spreads create valuation mismatches between assets and liabilities, further impacting solvency capital.

According to Swiss Re, reinsurance solutions can address these pressures while unlocking capital and liquidity. Standard longevity reinsurance reduces solvency capital and risk margins, while Funded Reinsurance transfers insurance and asset risks depending on the structure.

Hybrid longevity reinsurance, Swiss Re explains, allows insurers to transfer longevity risk along with market risks such as currency or inflation without transferring the underlying assets.

Swiss Re reports that combining longevity and foreign exchange risk under a Matching Adjustment portfolio improves efficiency. Premiums can be paid in foreign currency and claims received in GBP, transferring both longevity and currency risk.

This reduces collateral requirements for insurers, enables greater allocation to higher-yield or illiquid assets, and supports improved Bulk Purchase Annuity pricing.

The company also observes that integrating inflation protection with longevity coverage simplifies portfolio management. Aligning claim payments with pension liabilities indexed to inflation reduces the need for separate hedges, lowers collateral demands, and helps maintain stable long-term portfolio performance.

As noted by Swiss Re, pairing structured or illiquid assets with liability risk transfer allows insurers to include these assets in MA portfolios while mitigating longevity risk, recognising full cashflows, and enhancing yield.

Swiss Re further highlights that using gilt proxies to discount liabilities in non-MA portfolios can deliver immediate capital relief, reduce capital charges, and optimise accounting for products such as deferred annuities or long-term protection contracts.

The company concludes that these approaches improve liquidity, enhance portfolio yields, and strengthen solvency positions. Reduced collateral requirements free cash under both normal and stressed conditions, while higher-yield asset inclusion supports investment returns and Bulk Purchase Annuity pricing. Liability revaluation and risk margin reduction enhance solvency ratios, particularly by leveraging gilt-swap spreads.

The carrier explains that reinsurance is no longer just a risk transfer tool but a strategic instrument for capital management, liquidity optimisation, and portfolio resilience in competitive and volatile markets.