What happened? In a speech from yesterday, The PRA has reiterated concerns regarding UK annuity writers'' use of Funded Re, and suggests it may take policy action. While this sounds like a first-order negative for the sector, we think it would likely improve the market structure. BNPP Exane View: . CONCERNS: The PRA''s speech reiterates its concerns about the use of Funded Reinsurance in the UK annuities sector. Under these structures, the primary underwriter pays an upfront premium to the reinsurer, who thereafter invests in assets to provide guaranteed cashflows to the primary insurer to pay the annuity income to the end customer. . RISKS: the PRA specifically highlights that it has seen ''examples of large cashflow mismatches, as well as large unhedged currency exposures in current FundedRe transactions, far beyond what we would see in typical UK annuity firms'' direct investments''. The PRA is concerned less about the level of current exposures, and more about the outlook if Funded Re proliferates further. For our discussion of the latest developments in alternative assets within the insurance sector, and associated risks, see A private matter. . TREATMENT: the PRA highlights that the treatment of the contract as reinsurance when bundled with longevity transfer means the arrangement provides more capital relief to the primary insurer than an equivalent arrangement structured as a loan, despite similar economics. The implication is that the PRA is considering a change in its treatment of reinsurance assets under Solvency UK - whether to increase the capital requirements or impose a cap on the use of Funded Re, or something else. . GEOGRAPHY: the PRA also highlights that Funded Re assets are typically not UK investments, and so the use of Funded Re acts against their secondary objective of supporting UK economic growth. . INNOVATION: the PRA notes the demand for alternative sources of ''patient capital'' in the annuity sector and discusses the...