PRA publishes consultation paper on new UK captives regime

INTRODUCTION

The PRA has published proposals for a new UK captive insurance regime. The proposals mark a significant step in the Government's drive to develop a domestic captive market which it believes will boost the competitiveness of the UK's insurance industry and give businesses greater flexibility in managing risk.

At the centre of the new framework is a bespoke regime for captives that departs materially from Solvency UK, with lower capital and reporting requirements, greater flexibility on capital resources and faster authorisation processes. The aim is to make the UK a credible alternative to established captive domiciles while preserving appropriate policyholder and prudential protections.

The PRA considers that the proposed framework would compare favourably with established captive jurisdictions, particularly on regulatory certainty, supervisory credibility and proximity to insurance and wider financial services infrastructure. Its proposed 4-6 week authorisation target, capital requirements and flexibility to use contingent capital instruments are also broadly aligned with international norms.

Whether the regime attracts UK captives may also depend on tax frameworks in other jurisdictions. Tax is outside the PRA's remit, of course, although the Government has said it does not consider tax reform necessary to introduce a competitive captive insurance framework.

The new regime will be delivered in stages: 

• Stage 1 relates to single-parent captives i.e. captives that can only (re)insure risks of group entities and parties that are connected to the group. This stage of the reforms is covered by the current PRA consultation (CP11/26) and by a FCA consultation (CP26/29), which was published at the same time to deal with conduct matters.
• Stage 2 will extend the regime to protected cell companies (PCCs) once legislation enabling insurers to operate through PCC structures is in place. 

A 14 October 2026 deadline for responses to the Stage 1 proposals is expected to be followed by implementation of the new framework in mid-2027.  Timing for Stage 2 of the reforms is less clear.

KEY TAKEAWAYS  

Some key points to note are:

• A genuinely bespoke regime – the proposals represent a materially different regulatory framework for UK captives, rather than limited adjustments to Solvency UK.
• Single captive type – the PRA proposes a single UK captive category that can write both direct and reinsurance business, subject to certain limitations.
• Speed of authorisation - the proposed 4-6 week timeframe for deciding complete applications is designed to put the UK on an equal footing with other leading captive jurisdictions.
• Lower financial requirements – significant differences from Solvency UK financial requirements are designed to lower the regulatory burden in line with the lower risk profile of captives. This includes a simplified factor-based capital requirement, a £100,000 floor and greater flexibility to use contingent capital instruments, including letters of credit and parental or group support agreements, as Tier 2 capital.
• Simplified governance requirements – proposed governance requirements, including the possibility of a single mandatory SMF, are intended to reduce the regulatory burden on captives in line with their lower risk profile and typical operating model.
• Reporting reduced by up to 80% in frequency and 75% in volume – the regime would retain an ongoing reporting obligation, but on a reduced basis compared to Solvency UK. 
• Supervisory approach – supervision would be largely portfolio-based, with firm-specific engagement triggered mainly by reporting, notifications or proposed business changes.

SCOPE OF THE REGIME

The scope of the new framework is set as follows:

• A new section of the PRA rulebook will be dedicated to firms that are authorised as “UK captive insurers”, a definition which captures single-parent, or 'pure', captives.  This will sit apart from rules applying to Solvency UK firms and non-directive firms.
• A “UK captive insurer” will be defined as a fully owned subsidiary incorporated in the UK, the purpose of which is to insure only risks of its group entities and material non-group undertakings (MNGUs) which are connected to the group.
  • Extension of the regime to MNGUs means that a UK captive will be able to insure non-group firms with material contractual and financial relationships with the UK captive’s group, provided that the insured exposure arises directly from those contractual relationships. 
  • Four permitted structures of MNGU are proposed: owner-controlled insurance programmes (OCIPs), significant suppliers, franchisees and entities where the group holds a minority stake of at least 5%.
  • OCIPS are typically used on large-scale construction projects where a centralised insurance programme is put in place by the project owner to cover all parties working on a project.  Where that programme is placed through a captive, the PRA has decided that the interests of programme participants are aligned such that OCIPS could be included within the UK captive regime.
• UK captives will be able to write most types of general insurance business on a direct or reinsurance basis, subject to some limitations, as set out below. 

AUTHORISATION

The PRA’s approach to authorising UK captives under the new framework is designed to be proportionate and supportive, while also ensuring that applications meet required standards to meet the relevant threshold conditions for authorisation. Of particular note:

• A UK captive would require PRA authorisation, with the FCA's consent, and would therefore be dual-regulated, in the same way as other insurers. 
• Before submitting a formal application, applicants can choose to engage with the PRA and FCA with the aim of streamlining the application process and securing an early and successful outcome. 
• A streamlined application pack will be based on adapting existing authorisation requirements for insurers to reflect the nature of captive business. It will aim to avoid unnecessary information requests. 
• The PRA considers that, in most cases, UK captives will pose lower risks to the PRA’s objectives than many other insurers and therefore proposes to take a correspondingly proportionate approach to assessing applications. 

• The PRA will aim to determine complete applications within 4-6 weeks. 

   

SUPERVISION AND REPORTING

The PRA proposes a deliberately proportionate supervisory model for UK captives, reflecting their classification as Category 4 firms and their limited potential to disrupt the UK financial system. 

Supervision would be data-driven and trigger-based, with the PRA monitoring captives on a portfolio basis and engaging with individual firms mainly where reporting, notifications or proposed business changes indicate potential risks. UK captives would, nonetheless, remain subject to the PRA’s Fundamental Rules and the PRA would retain the ability to request information, engage with firms and take supervisory action where necessary.

Simplified annual regulatory returns and statutory financial information will be used to monitor UK captives. The PRA has said that its approach will significantly reduce the frequency (by up to 80%) and volume (by up to 75%) of regulatory reporting applicable to captives compared to its existing baseline requirements. 

FINANCIAL REQUIREMENTS

The PRA’s approach to setting financial requirements for UK captives is also designed to reflect the generally lower risk profile of UK captives and their limited scope of business.  Headline differences from the Solvency UK regime include:

• simplifying the valuation of assets and liabilities (including insurance liabilities) on the regulatory balance sheet by using relevant accounting standards;
• moving from a risk-based capital requirement to a factor-based captive capital requirement (CCR) set at 10% of net written premiums or net insurance liabilities, subject to a £100,000 floor; 

• simplified eligibility criteria for capital used to meet capital requirements, with more flexibility to use contingent capital instruments above the £100,000 floor. The PRA proposes to permit captives to recognise letters of credit and parental/group support agreements as Tier 2 capital (subject to conditions) for the purpose of meeting the additional CCR, reflecting international captive practice and industry feedback on the importance of capital flexibility.

   

GOVERNANCE

Proposals on governance include the following:

• Senior Managers Regime – only one SMF would be required for UK captives, as opposed to the current Solvency UK requirements which require at least three designated SMF roles. The PRA will introduce a Chief Executive function (SMF1) for UK captives, which could be held by a director of a third party such as an outsourced service provider. 
• Board composition – the PRA proposes that the board of a UK captive should include at a minimum one non-executive director. It will also expect UK captives to appoint an independent non-executive director on the board, where this is proportionate to the nature, scale, and risk profile of the firm. The rationale for this is the potential consequence of captives sitting within the same corporate group whose risks they insure, creating tension between group commercial objectives and prudent insurance operations.
• Third-party arrangements and outsourcing – the PRA’s approach to governance specifically references the fact that captives will often rely heavily on captive managers and other outsourced service providers. Unsurprisingly, third-party arrangements will not diminish the responsibility of the board or senior management for regulatory compliance, risk management or prudential outcomes. Overall accountability must remain clearly allocated to the firm's senior management, including the individual(s) performing the SMF1 role. 

FCA CONSULTATION

The FCA consultation is complementary to the PRA consultation and deals with the following key conduct points: 

• The conduct framework for captives is intended to be proportionate, with significant Handbook carve-outs. In particular, proposed amendments to the Glossary definition of 'retail market business' would exclude insurance business carried on by a captive insurer, effectively removing captive insurance from the scope of Consumer Duty. In addition, INSPRU, MIPRU, PROD, ICOBS, CASS, DISP, COMP and TC are disapplied. 
• Captives would not be permitted on a direct basis to enter contracts with, or cover, individuals or entities eligible to refer complaints to the Financial Ombudsman Service, including consumers, SMEs that fall outside the Handbook definition of 'large commercial customers', or policy stakeholders. Captives can, however, write such business on a reinsurance basis.
• A new Section SYSC 3.5 ('Additional requirements for captive insurers') will be introduced, setting out the FCA's approach to captive managers. The FCA expects that most captive manager appointments will constitute material outsourcing, and it has proposed additional rules and guidance on this basis, with the FCA's outsourcing guidance in SYSC 13.9 and the SUP rules on suppliers applying accordingly.

Please do not hesitate to contact us if you would like to discuss any aspect of these proposals, your response to the consultations, or your captive strategy more broadly.