Captive audience: Will the UK's new captive insurance regime attract global attention?

Current position

The government has noted that despite the widespread use of captive insurance by both UK and international companies, UK companies often choose to establish their captives overseas. Despite the UK having a world-leading insurance sector, the government believes the UK is not currently seen as an attractive destination for captives because, in the absence of any specific regulation, prospective UK captive insurers face the same authorisation, governance, reporting and capital requirements as other insurers and reinsurers. 

The proposed reforms aim to allow the UK to compete globally as a potential domicile for captives, whilst also protecting policyholders and consumers, and allowing these businesses to manage their risks while maintaining resilience, ultimately providing economic benefits to the UK.

The government's approach

The consultation starts from the basic understanding that a well-designed regulatory approach is essential for making the UK captive insurance market attractive and successful. It acknowledges that any new framework must include proportionate regulatory requirements that align with the risk profile of captive insurers.

The document sets out several potential features of a new regime which the government feels "may be justified in order to encourage more companies to consider establishing a captive in the UK", and seeks feedback on these proposals as follows: 

Types of captive

The consultation proposes different levels of regulation for "direct-writing captives" and "reinsurance captives". A direct-writing captive is defined as a captive insurer that insures the risk of one or more of its group members. A reinsurance captive is a captive insurer that reinsures the risk of one or more of its group members. The consultation also references the potential to add further categories of captive in the future should the market develop.

The distinction between direct-writing and reinsurance captives is common in the global market. Fewer jurisdictions allow direct-writing captives compared to reinsurance captives. 

Reinsurance captives are generally more popular because they face lower regulatory and financial barriers due to their perceived lower risk given they rely on the established commercial insurance industry, including fronting carriers and brokers. For example, in Luxembourg (the most popular captive reinsurance market in Europe), reinsurance captives are more common due to less stringent capital requirements and easier structuring, which has recently been followed by France's introduction of a tailored reinsurance captive framework in 2023.

This part of the consultation is expected to generate significant feedback. The debate centres on whether a regime which only allows reinsurance captives is competitive and sensible, given the existing fronting infrastructure and talent in the UK; or if direct-writing captives should also be supported to enhance flexibility and bring perceived riskier underwriting activity into a bespoke regulatory framework.

The consultation is still undecided on which specific aspects of insurance regulation (both prudential and conduct) could be adjusted for each type of captive. It seeks further feedback from participants on this topic. 

Exclusions and limitations

The government proposes that regulated firms in financial services and pensions (e.g. insurers, banking groups, pension funds, and superfunds) should be excluded from establishing and passing risk to their own captives. This aims to "simplify and speed up the implementation process" while limiting risks to market participants and overall financial stability from potential captive failures.

Additionally, the government's "initial view" is that captives should not be allowed to write life insurance or compulsory lines (motor insurance and employer's liability). The consultation further suggests a classification-based system where the regulator would decide if other liability lines could be written by either: direct-writing and reinsurance captives; reinsurance captives only; or no captives at all.

In response to this portion of the consultation, some industry stakeholders have disclosed their concerns that that prohibiting captives from writing life or compulsory business could make the UK less competitive compared to other domiciles, citing that in the EU, captives successfully write pan-European motor business under strict regulatory scrutiny, suggesting a model for success.

Some stakeholders have also called attention to an alternative model, i.e. that of countries such as Gibraltar, where there is a "dual regime", where direct writing of compulsory lines is permitted, albeit only into the United Kingdom – therefore naturally incorporating the safeguard that the regulatory controls applied to direct writing vehicles would be higher.

Captive managers

The consultation notes that stakeholders have shown interest in a separate regulatory approach for captive managers. However, the government disagrees with this idea, arguing that many potential captive managers are already part of existing insurer or intermediary groups.

The consultation proposes two options:

(a)    the FCA continues to regulate captive managers through the existing Senior Managers and Certification Regime; or

(b)    introducing a new regulated activity specifically for captive managers.

We note that the results of a joint review of the Senior Managers and Certification Regime by HM Treasury and the PRA/FCA in 2023 are awaited – one of the areas considered is to remove/modify the Certification Regime – see our earlier article about the Chancellor's Mansion House speech UK Chancellor of the Exchequer’s Mansion House speech (14 November 2024) – summary of key initiatives.

The licensing and credentials of captive managers differ across jurisdictions. However, the UK's approach is not entirely out-of-step with other regions, including many US states, where qualifications for captive managers are broadly defined in terms of "competence," "experience," "character," and "reputation". 

It is generally unusual to apply a separate supervisory standard for captive managers. Speaking earlier this year, one global regulator stated they "try to avoid difficulties by not licensing problem captives, including those with captive managers they are uncomfortable with, in the first place", rather than regulating captive managers specifically.

Protected cell companies

The consultation acknowledges that captives may be allowed to operate through cells of a protected cell company (PCC). This approach could provide a more viable option for smaller companies, as they would not need to create and capitalize a full captive insurance entity. This could help the UK attract a larger share of the global captive market. At the same time as this consultation on PCCs, the PRA is currently consulting on how the UK's Insurance Special Purpose Vehicles regime can be improved in CP15/24.

PCCs were introduced in Guernsey and have more recently become popular in Malta, where a specific Companies Act on cell companies exists. Other jurisdictions such as Gibraltar have also had great success with PCCs, being the first EU jurisdiction to introduce a PCC Act in 2001. The UK already has PCC legislation and a regulatory framework, but it is currently limited to insurance-linked securities (ILS) business. London's ILS regime has not been widely used, and there is a strong argument that opening PCCs to captive business could revitalize the UK's cell company offering. 

Other considerations

Finally, the government acknowledge that tax incentives alongside other fiscal considerations can have an influence on company decisions on where to base their captives; however, its preliminary view is that tax incentives are "not a necessary component of implementing a modern, competitive UK captive insurance approach". The consultation invites feedback from respondents on this point.  

Authored by Bethan Savage.