Captive insurance regulatory regime to be introduced in the UK

Details of the plans were outlined by the UK government in a response it published to a consultation exercise it opened in November 2024 (23-page / 141KB PDF). In its consultation paper issued at the time (21-page / 163KB PDF), the government set out plans to develop “a new approach for the regulation of captive insurance companies in the UK”.

Captive insurance is a method of self-insurance and risk management. Among other uses, captive insurance provides businesses with greater opportunity to control, and contain, insurance programme costs and the ability to tailor coverage for their specific risks.

Despite the UK being recognised as a leading insurance market globally, most captives are based outside of the country. The UK government wants to change that by establishing an attractive regulatory regime. This desire forms part of the government’s wider strategy to support the growth and competitiveness of the UK’s financial services sector.

The Prudential Regulation Authority (PRA) and Financial Conduct Authority (FCA) will be responsible for using their statutory powers to develop the new regulatory regime, which is anticipated to differentiate between two types of captive: direct-writing and reinsurance. The distinction between direct-writing and reinsurance captives is common in the international market. A direct-writing captive is 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.

While the overall response to the November 2024 consultation was reported by the government to be positive, with expressions of support for the high-level proposals outlined in the consultation, the majority of respondents wanted the government to go further than the scope which had been proposed so as to allow more types of firms to be permitted to set up captives; and more types of risk to be insured by them. In response to the feedback received, the government has, in relation to certain aspects, adapted its initial policy view.

It has now confirmed that there is a case for allowing financial services firms to establish their own captives “for specific, limited purposes” and that, similarly, there is a case for captives to also be able to write “specific, limited types” of life insurance products such as group life fixed-term policies, having previously outlined its intention to exclude both possibilities.

In respect of compulsory lines of business, such as employer’s liability insurance, the government’s starting position was that captives should not be able to write these lines, citing the need to protect third parties and preserve the integrity of the UK’s compulsory insurance requirements. Its position has not changed for compulsory lines written by captives on a direct basis. However, it acknowledged that captives writing these lines on a reinsurance basis offers an additional level of protection and agreed that this could be permitted.

The government is supportive of the notion of incorporating captive insurance into a protected cell company (PCC) framework given that this structure could be attractive to smaller companies that may not wish, or have the means, to establish a standalone captive insurer. PCCs are bodies corporate that divide their assets and liabilities into separate, segregated “cells”. Each cell operates as a distinct entity, protecting its assets from the liabilities of other cells and the core company. New cells can be created without the need for additional regulatory approvals.

In this regard, the government has also published a separate consultation on improving the wider regulatory framework for risk transformation (20-page / 136KB PDF), including the future role of PCCs and how they can be established to facilitate captive insurance business instead of risk transformation.

The government said it does not, however, consider it necessary to provide tax incentives to encourage captive insurers to establish themselves in the UK.

Rob Paine of Pinsent Masons, an expert in insurance regulation, said: “The government’s commitment to a captive regime has been welcomed by industry but the detail of the regime – and how competitive it actually is with, for example, the regulatory rules of other jurisdictions – remains to be seen.”

“The PRA’s and FCA’s future consultations will set out the proposed rules and will allow industry the opportunity to further engage and comment,” he said.

The regulators’ consultation is expected in summer 2026, with a view to the new framework being implemented “in mid-2027”, according to the government.

“Detailed rules will be for the regulators to consider and establish,” the government said. “However, the government anticipates that these will include proportionately lower capital and reporting requirements and facilitating faster authorisations for captive insurers. The government’s view is that these changes do not require new legislation. The government does not intend to create a bespoke regulatory framework for captive managers, as it considers that the existing regulatory framework for insurance intermediaries is sufficient. The government anticipates that the FCA and PRA will consider how that framework can be tailored as they develop the wider regulatory approach.”

The government’s plans for captive insurance regulation are part of a wider package of changes to UK financial services regulation, dubbed the Leeds reforms. The Leeds reforms were outlined alongside UK chancellor Rachel Reeves’ Mansion House speech on 15 July and include draft regulations for ‘targeted support’, which experts at Pinsent Masons have said will play a “critical role” in helping consumers optimise their pension savings in retirement, as well as reform to the ring-fencing rules that require UK banks to separate their retail and investment banking activities.