Government kick-starts discussion on a regulatory regime for captive insurers

What does this mean?

The Government has received representations from the industry to improve the UK’s attractiveness for captive insurers, these include proposals for: lower capital requirements, reduced application and administration fees, a faster authorisation process, and less stringent ongoing reporting requirements. The Government seeks views on the case for change; it explains the PRA and FCA will deliver the detailed proposals on capital requirements, authorisation and supervision. 

To allow regulators to regulate in line with the different risks presented by the type of captive, the Government explores differentiating between direct-writing captives and reinsurance captives. The Government also proposes that certain regulated firms dealing with financial services and pensions should be excluded from establishing their own captives. This is to avoid regulatory arbitrage, and minimise the potential for financial stability risks. Additionally, the Government considers that captives should not be able to write life insurance and compulsory lines of business e.g. employers liability and motor insurance. 

Captive managers are third-party firms employed to establish or manage captive insurers. The Government received suggestions that a separate regulatory framework for captive managers would help ensure proportionality. The Government considers that a distinct approach would be excessive given the risk profile of captive businesses, as many potential captive managers are already part of existing insurer or intermediary groups. 

The Government also explores whether captives should be permitted to operate via cells of a protected cell company (PCC). PCC captives could be a more efficient route for smaller companies who would not be required to create and capitalise a full captive insurance entity, allowing the UK to attract more of the global captive market.

The Government considers tax incentives are unnecessary for implementing a modern, competitive UK captive insurance approach and does not plan to offer these incentives. Additionally, it expects all captive insurers operating under the new regime to be UK resident.

What do firms need to do?

Companies considering captive insurance should engage closely with the development of the new regime, as these changes could impact their business operations and compliance efforts, particularly with regards to application, authorisation, governance, and capital requirements. 

While it is for UK regulators to determine the details of the regime in the future, companies should consider if captive insurance would be a suitable option for their business model going forward. This could include considering the type of captive insurance they could benefit from, direct-writing or a reinsurance captive. Companies should also consider the potential exclusions and limitations for certain types of companies, and understand the tax implications of setting up captive insurance within the UK. 

Companies may also wish to consider the option of establishing a captive cell within a PCC framework. This could be a more viable and cost-effective route for smaller companies looking to enter the captive insurance market. Additionally, companies may want to assess the potential regulatory approach for captive managers. The current view is that a separate regulatory approach might be disproportionate, and the FCA could continue to regulate captive managers under the existing Senior Managers and Certification Regime.

Next steps

The consultation closes on 7 February 2025, following which HMT will engage closely with the PRA and FCA before deciding on next steps.