News & Views

The UK's proposed captive insurance regime: Can it compete with the world's leading captive domiciles?

For many UK businesses, the concept of establishing their own captive insurance facility or a variation of this (e.g. a Protected Cell Company) has traditionally meant looking at overseas jurisdictions such as Bermuda, Guernsey, IOM, Gibraltar, and Luxembourg et al. These have long been recognised as offering established regulatory frameworks and management support for businesses seeking the benefits of greater control over either their own insurance arrangements or a customer centric insurance facility. That may be about to change.

Following HM Treasury's consultation in 2024, the Financial Conduct Authority (FCA) and Prudential Regulation Authority (PRA) have recently published proposals for a bespoke UK captive insurance regime which is arguably long overdue. The proposals form part of the Government's wider ambition to strengthen the UK's position as a global financial services centre, offering an attractive alternative to other less convenient and arguably more expensive jurisdictions.

The burning question is whether the UK can introduce a captive regime which can offer a compelling alternative to those jurisdictions which have spent decades developing and refining their own captive offering.

Here are some practical considerations for a business using a captive facility.

Many businesses, large and small, already make use of captives which are regulated and licensed in overseas jurisdictions. A UK based regime could offer a more convenient and cost-effective option, which is likely to warrant careful consideration in the context of businesses wanting to extract maximum value from what will be a significant annual expenditure for them.

In addition, some of the benefits of a captive insurance facility will include the following:

• Reducing reliance on commercial insurers, allowing for greater flexibility in a market with reduced capacity;

• Retaining risk premiums on a group’s balance sheet for investment purposes;

• Constructing customised risk transfer solutions to provide protection that may not be readily available in the open market.

A more proportionate approach

A captive insurer is a regulated insurance company, established by a business wishing to insure its own risks, based on its own claims profile, as opposed to purchasing cover from the commercial insurance market where premiums are determined by the loss experience of the entire portfolio of insureds. For the right business, with good internal risk management, and a solid claims history, a captive can offer greater flexibility in terms of risks to be insured and potentially more stable and lower long-term insurance costs.

The UK's regulatory framework has historically been largely designed with commercial insurers in mind, making the regulatory burden disproportionate for a captive insurer, which is only underwriting the risks of its parent group.

The FCA and PRA are now seeking to redress that imbalance through a tailored regime, focused initially on "pure" or single-parent captives. The proposals aim to apply regulatory requirements that better reflect the lower risk profile of captive insurers, while maintaining appropriate levels of governance and oversight.

How does the UK compare?

The FCA’s proposals will inevitably invite comparison with other well established captive jurisdictions.

Bermuda remains one of the world's leading captive centres, combining a sophisticated regulatory regime with decades of experience and a well-developed network of captive managers, actuaries, and professional advisers. This makes it potentially attractive for multinational businesses with complex insurance programmes.

Closer to home, Guernsey has built a strong captive market through proportionate regulation, specialist knowledge, and innovative structures such as Protected Cell Companies (PCCs), enabling businesses to access captive solutions without having to incur the expense of establishing a standalone insurer with the long terms liability and run off costs which that entails.

Similarly, the Isle of Man has developed a respected captive sector by offering regulatory flexibility alongside close links to the UK market.

Luxembourg occupies a different position, attracting many multinational groups seeking access to the European market through a stable and well-established regulatory environment.

Across the pond, Vermont has become the largest captive domicile in the United States, benefiting from decades of legislative development and an extensive ecosystem of specialist advisers and service providers.

These jurisdictions all demonstrate that successful captive markets rely on more than simply having enabling legislation. Regulatory integrity, efficient authorisation processes, strong reputational profile, well established actuarial and management services, and a mature and competitively priced professional advisory infrastructure are equally important considerations.

A different competitive proposition

The proposed UK Captive regime is seeking to offer the credibility associated with FCA and PRA supervision at the same time as introducing greater proportionality in relation to the regulation of captive insurance companies when compared with commercial insurance companies. For UK-based businesses, will that be sufficiently attractive from a corporate governance perspective to persuade boards to consider moving away from their traditional approach of placing their insurance covers via their broker into the commercial insurance market/s, coupled with managing their own insurance arrangements within a familiar legal and regulatory environment without having to go offshore?

Alongside this a UK Captive regime would provide direct access to the London Market which provides unrivalled capacity and expertise. The UK has a well-established professional community of law firms, insurance managers, actuaries, and others who understand risk transfer and know what is required to make a captive facility successful.

Ultimately, the success of the FCAs proposals is likely to depend on whether businesses perceive there to be a sufficient commercial benefit to establishing a new captive for themselves or relocating an existing one, which could involve considerable cost and complexity.

Looking beyond the consultation

The proposals coincide with a backdrop of heightened sensitivity in relation to corporate risk management. Cyber threats, climate-related exposures, supply chain disruption, and geopolitical uncertainty are just some of the issues which have prompted organisations to reassess how they finance and manage risk.

Alternative risk transfer solutions, including captives, are attracting increasing attention from businesses seeking greater control over the cost and sustainability of their risk transfer/risk retention arrangements. The detail of the final rules—including issues such as capital requirements, authorisation processes, and the future availability of structures such as Protected Cell Companies—are yet to be decided, but if the UK is able to develop a competitive alternative to other established captive jurisdictions, it could become the disruptor in what has become quite a crowded, expensive, and some would say, complacent marketplace.

Looking ahead

With the consultation closing on the 14th October businesses still have time to influence the UK Captive regime.

At O'Connors, we work with businesses across a broad range of sectors on corporate, commercial, insurance and regulatory matters. As the proposals for a UK captive regime evolve, maybe now is the time to think the unthinkable and contemplate an alternative approach to risk retention/risk transfer, and which jurisdiction is best suited to your long-term commercial objectives.