Captive insurance comes home: Prudential Regulation Authority proposes a bespoke UK regime

UK competitiveness as the case for change

The proposals follow the chancellor’s July 2025 Mansion House announcement, committing to a new UK captive insurance framework, and HM Treasury’s subsequent consultation response. The stated ambition is to make the UK the location of choice for captive insurance business and to onshore captives currently established in offshore jurisdictions.

At present, there are no UK-headquartered captives authorised to write new business in the UK. This is largely because the existing Solvency UK framework applies substantially the same prudential requirements to captives as it does to commercial insurers, despite their materially different risk profiles, relying largely on the proportionality principle to reflect these differences. The new regime creates a distinct category of insurer, separate from both Solvency UK firms and non-directive firms, with meaningfully lower capital, governance and reporting requirements. 

Captives: a lower risk profile

The PRA’s proposals are focused on single-parent captives, which generally pose low risks to its primary objectives of safety and soundness and policyholder protection. This is because a single parent captive’s main policyholder is its parent or other group companies, resulting in:

• close alignment of interests between the captive and its group
• little or no information asymmetry, since captives often have access to high-quality historical claims data
• limited negative public externalities, given the contained scope of the regime. 

Importantly, as an extension to the single-parent captive concept, the PRA is proposing that non-group undertakings with material contractual and financial relationships with the UK captive’s group, where the insured exposure arises directly from those contractual arrangements.

A captive can offer its parent group a number of advantages over traditional commercial insurance: it can help manage insurance costs and provide direct access to reinsurance markets; it can encourage stronger risk management practices by requiring the parent to engage more closely with its own risk profile; and it can provide coverage for excluded or expensive risks that may be unavailable or uneconomical in the commercial market.

A departure from Solvency UK proportionality

The proposed regime at this stage only covers single-parent (“pure”) captives. Crucially, this is not an exercise in recalibrating Solvency UK’s existing proportionality mechanisms for captives. Under the current Solvency UK framework, captives benefit from some simplifications, but they remain subject to substantially the same regulatory requirements as commercial insurers writing third-party business.

The PRA has concluded that this approach is disproportionate and that a fundamentally different framework is warranted. The result is a new, distinct category of insurer, separate from both Solvency UK firms and non-directive firms, with its own dedicated rulebook provisions and supervisory statement. 

The proposed regulatory perimeter 

The proposed scope of permitted business requires close attention. Captives may write insurance on a direct or reinsurance basis. Where a captive writes reinsurance, it relies on a fronting insurer to act as the interface with the insured. The table below demonstrates the treatment of various lines of business under the current proposal. 

In effect, the regime confines captives to operational, underwriting and commercial risk and does not extend to financial risk. This stands in notable contrast to Bermuda, where Class 1 and 2 captives face no equivalent restrictions on life insurance, employee benefits or compulsory lines, and there is no “reinsurance only” limitation on any of these categories. The distinction is a meaningful one and will disappoint some market participants, although the PRA has indicated that it may revisit the investment risk exclusion as the regime matures.

On the perimeter of who can be insured, the regime extends beyond the captive’s own group. The proposals allow captives to insure material non-group undertakings, defined as entities with a material contractual and financial relationship with the group, where the insured exposure arises directly from those arrangements. This is a valuable extension, particularly for groups which have supply chain dependencies and vulnerabilities.

Capital and financial resources

The proposed capital framework represents a substantial simplification. 

• The baseline capital requirement is set at GBP100,000, to be met with Tier 1 capital (usually equity) only. This represents a significant reduction from the GBP2.4 million minimum capital requirement floor (or GBP1.2m for captive reinsurers) under Solvency UK.  
• Above the baseline capital requirement, the captive capital requirement (CCR) is calculated as the higher of 10% of net written premiums and 10% of net insurance liabilities, and may be funded with either Tier 1 or Tier 2 capital. This replaces the risk-exposure-based solvency capital requirement under Solvency UK.  

The capital resources framework is notably flexible. Letters of credit and parental or group support agreements are recognised as Tier 2 capital, provided they meet specified conditions including being available on demand, legally binding, irrevocable and not subject to set-off. Intra-group loan-backs are also permitted, subject to appropriate documentation and liquidity management.

Governance

Governance requirements are streamlined to reflect the lower risk profile of captives. Only one Senior Management Function (SMF) is required as a minimum, SMF 1 (executive director), down from the three SMFs typically required under Solvency UK. However, more complex firms may need to appoint more than one SMF1 holder or consider an SMF3 (executive director).

Each UK captive board must include at least one non-executive director, and the PRA expects captives to assess whether the nature, scale and complexity of their risks warrant the appointment of an independent non-executive director.

Authorisation and supervision

The PRA is targeting a four- to six-week authorisation timeline for complete applications. UK captives would be classified as Category 4 firms (the lowest supervisory categorisation). Reporting is limited to simplified annual regulatory returns alongside audited statutory accounts.

A deliberate first step

The PRA is clear that this is an intentionally phased approach. Protected cell company structures, group and association captives, and a broader range of permitted business lines are all earmarked for future consultation.  The PRA has also expressly invited feedback on whether the scope should be expanded to accommodate, for example, captive reinsurance of customer risks. 

Despite certain limitations, the consultation represents a meaningful step. It establishes a genuinely distinct framework and signals the PRA’s willingness to advance a competitive UK captive regime. In its own assessment, the PRA considers the UK may be particularly competitive with respect to regulatory certainty, supervisory credibility, proximity to established insurance and reinsurance markets and financial services infrastructure, and proximity to parent groups in the case of UK-headquartered organisations.

CP 11/26 and CP26/29 are open to responses until October 14, 2026.