20 November 2024 Tim Brown Financial Regulation - Insurance

UK government seeks views on a new approach to captives

HM Treasury has posed a series of open questions on captive insurance in a consultation paper published on 14 November 2024, alongside a raft of other papers connected to the Chancellor’s recent speech at the Mansion House. The early-stage consultation is intended to garner views on a number of different aspects of captive insurance as the government assesses the extent to which a new approach to captives could help to support the growth and international competitiveness of the UK’s insurance sector.

The UK is not attracting captive business

In its consultation, HM Treasury suggests that captive insurers – which insure or reinsure the risk of other companies within the same group – tend to be domiciled outside the UK, despite the UK’s eminent position in the insurance world and the wealth of relevant expertise it has to offer. The Treasury cites one estimation that around 500 UK-associated captives are currently located in offshore jurisdictions. 

There is a perception, according to the Treasury, that the UK is not currently an attractive destination in which to set up a captive insurer, some of which may come down to the current regulatory regime for captives, which essentially imposes many of the same rules – for example in relation to authorisation, governance, capital, compliance and reporting – as other, non-captive insurers and reinsurers. 

A new approach?

The government is therefore keen to hear views on the kinds of changes that might be made to boost the UK’s prospects as a destination for captive insurance business. The government acknowledges that this may involve introducing more proportionate regulatory requirements, better reflecting the risk profile of captive insurers. This could, for example, mean lower capital requirements for captives, reduced application and administration fees, faster authorisations and lighter-touch reporting obligations. 

The nature of these kinds of changes is such that it may be more for the Prudential Regulation Authority and the Financial Conduct Authority to determine the detail of any proposed changes. 

Questions and views

HM Treasury asks a number of questions in its consultation, and expresses some views, including: 

  • What specific aspects of the existing insurance regulations need to change to encourage the establishment of UK captive insurers?
  • Should regulation differentiate between different types of captive, e.g. direct-writing captives vs. reinsurance captives? 
  • Should certain activities be excluded and certain types of firms be prevented from setting up captive insurers? Here, the Treasury expresses its opinion that regulated firms dealing with financial services and pensions should be excluded from establishing (and passing risk to) their own captives. This, it says, should avoid regulatory arbitrage and minimises the potential for financial stability risks.
  • The Treasury also suggests that any future approach would likely look to limit captive insurers’ ability to write certain lines of insurance business. The government’s initial view is that there are strong arguments that captives should not be able to write either life insurance or compulsory lines of insurance. 
  • How should captive managers (third party firms engaged to establish or manage captives) be regulated?
  • Should it be possible for businesses to establish a captive cell using the UK’s protected cell company framework?
  • The Treasury suggests that captive insurance owners are mindful of jurisdictions’ reputations, regulatory environments, taxation arrangements and access to domestic markets when they decide where to be based. It asks what specific proposals would make the UK more attractive and also expresses its opinion that tax incentives are not a necessary component of implementing a modern, competitive UK captive insurance approach.
  • The Treasury also asks a number of questions about the likely impacts on the UK economy of the establishment of a new captives regime. 
Next steps

The consultation closes on 7 February 2025. HM Treasury says that it will carefully consider the responses and engage closely with the PRA and FCA before deciding on next steps.