Insurance Blog Post: UK Government Proposals for a New Captive Insurance Framework

In July, the UK government published its response to its earlier consultation on establishing a new framework for captive insurance companies in the UK. 

A key aim of the proposal is to maintain and enhance the UK’s reputation as a vibrant, innovative, and internationally competitive insurance market. By updating the framework, the government seeks to ensure that UK-based businesses, and those considering locating in the UK, see it as an attractive and flexible environment for captive insurance, matching or exceeding offerings in other jurisdictions.

Another central objective is to protect policyholders and consumers, and ensure the ongoing safety and soundness of firms operating in the UK insurance sector. The new framework seeks a balance between regulatory flexibility for companies and their captives and robust prudential/consumer protections so that risk is managed effectively without putting third parties or the broader system at risk.

The government wants to help UK businesses manage their risks more effectively. By enabling more companies to use captives, and making the process more accessible, less costly, and quicker, it aims to let companies retain and control more of their risk in the UK, potentially improving resilience, freeing up capital, and contributing to productivity and innovation.
The new framework is also intended to deliver broader economic benefits such as job creation in insurance management, compliance, and related sectors; increased tax revenues; and support for the UK as a global financial centre. By attracting both domestic and international captive insurance business, these reforms are expected to drive growth beyond the insurance sector itself.

In terms of regulation, the government wants regulation for captives to be proportionate to the actual risks, leading to lower capital requirements, reduced fees, and more flexible processes. This should foster innovation both within the insurance sector and in other industries that use captives as part of their risk management strategies.

A further aim is to broaden access to captive arrangements, including for smaller companies, potentially through mechanisms like Protected Cell Companies (PCCs). This would democratise the benefits of captive insurance and make it viable for more UK businesses. 

Regulatory Simplification and Fast-Tracking

A cornerstone of the government’s proposals is the drive to simplify and streamline regulation specific to captive insurers, in a way that properly reflects their generally lower risk profiles compared to traditional insurance companies.

Key Elements of Simplification and Fast-Tracking:

• Lower Capital Requirements:
  Captive insurers will benefit from proportionately reduced capital requirements compared to fully authorised insurers and reinsurers. This acknowledges that most captives insure first-party group risks, which do not typically present the same systemic risks as retail or third-party underwriting.
• Streamlined Authorisation and Application Processes:
  The government proposes to make the establishment of captives quicker and more business-friendly. This includes reducing application and administration fees and improving the speed of authorisation by regulators. Some industry respondents recommended further measures, such as appointing a dedicated case officer to each application, to enhance the efficiency and predictability of the process.
• Proportionate Ongoing Reporting:
  The ongoing reporting and compliance burden for captives will be tailored to the lower risks they present, with significantly reduced requirements compared to traditional insurers. This means that reporting to the PRA and FCA will be focused on the essential information needed to ensure prudential soundness and consumer protection.
• Emphasis on Regulatory, Not Legislative, Change:
  The consultation response clarifies that most of these reforms can be adopted through changes to regulatory rules by the PRA and FCA, rather than through new primary legislation. This enables faster implementation and greater flexibility to refine the requirements as the market develop.
• No Tax Incentives:
  Notably, the government does not envisage providing new tax incentives to promote captives, instead focusing on making the UK attractive through the quality and proportionality of its regulatory environment

Scope: Who Can Set Up Captives and What Risks Can Be Insured?

The government’s original consultation proposed a relatively limited framework, restricting which firms could establish captives and the types of risks they could cover. These restrictions were intended to simplify early implementation and manage potential risks to market participants and financial stability. After extensive industry feedback, several significant changes are proposed:

• Broader Eligibility for Firms:
  While the government initially intended to exclude regulated financial services and pension firms from establishing or using their own captives, it now accepts there is a case for permitting a wider range of firms, including some financial services entities, to set up captives for specific, limited purposes. For example, financial sector firms may be permitted to establish a captive to cover direct first-party risks such as buildings owned by the firm. The final decision on precisely which types of risks are suitable for financial sector captives will be set by the PRA and FCA to ensure no regulatory arbitrage or systemic risk arises.
• Expansion of Insurable Risk Types:
  The government acknowledges broad support for allowing captives to insure a greater variety of risks. Notably, stakeholders sought the ability to cover compulsory insurance lines (such as employer’s liability), which are popular for captive use internationally. There is an openness to permitting these risks, but with important constraints on how such lines are written.
• Life Insurance Products:
  The government remains cautious about allowing direct life insurance due to the long-term nature of liabilities and the high bar for policyholder protection required. However, it recognises that group life fixed-term policies, frequently used for employee benefits and common in international captive practice, do not present the same long-term risk as typical life insurance. The government will work with regulators to determine a suitable, risk-limited scope for such products within UK captives.
• Compulsory Lines of Insurance:
  Direct-writing of compulsory lines (such as motor or employer’s liability insurance required by law) remains prohibited to protect third parties and uphold the integrity of the compulsory insurance system. However, following strong sector feedback, the response supports the use of captives for these lines on a reinsurance basis, meaning a fully authorised primary insurer remains responsible for claims, even if the captive fails. The PRA and FCA will determine any additional requirements that may apply to captives writing compulsory risks as reinsurers.
• Limitations for Higher-Risk Lines:
  Despite the broader approach, there is continued emphasis on excluding the use of captives to cover higher-risk or more complex lines by financial services firms, to avoid regulatory arbitrage and maintain financial stability. The specific list of exclusions and regulatory perimeters will be defined in upcoming rulemaking by the regulators.
• Ongoing Regulator Discretion:
  The PRA and FCA retain broad discretion to review and adjust the scope of eligible lines and participants as risks and markets evolve, ensuring the UK approach remains both responsible and competitive with other top international captive domiciles.

Protected Cell Companies: Expanding Access

Recognising that standalone captives may not be feasible for smaller businesses, the government proposes developing the UK's current (limited) regulatory framework for PCCs. PCCs allow multiple businesses to establish ‘captive cells’ that are legally protected from one another—a more affordable and flexible arrangement. The government is planning further reforms for PCCs as part of wider risk transformation regulation updates, for which legislative changes may be needed.

Captive Managers: Regulation

The government favours continuing to regulate captive managers under the existing insurance intermediary framework, instead of creating a new bespoke regime. This approach is considered proportional to the risk and will facilitate faster implementation. The FCA is expected to oversee this aspect through regulatory rules, possibly amending the authorisation process to suit the specific needs of captive managers.

Implementation Timeline and Next Steps

The PRA will consult on new rules for captives in summer 2026, aiming for a mid-2027 rollout of the new framework. The FCA will consult on its parallel proposals. Further engagement is planned, including cost-benefit analyses and consultations on PCC and wider risk transformation reforms.