Welcome to the UKGI weekly regulation update service for Aviva ABC brokers

Context

The FCA has published a Consultation Paper, CP26/29, alongside a Consultation from the PRA, on a new, bespoke, and proportionate regulatory framework for captive insurers in the UK.  Captive insurance is a method of self-insurance, where a business uses a regulated insurance subsidiary to finance risks from its own resources rather than paying premiums to a third-party insurer.

Key points to note and next actions

• Currently there are no captive insurers established in the UK, and businesses wishing to use this structure typically set up captives in other jurisdictions.
• The FCA’s proposals would introduce a proportionate conduct framework for single-parent captives – sometimes called ‘pure’ captives – that reflects their distinct business model and lower risk profile.
• This consultation will be of interest to those entities considering establishing a captive insurer in the UK; existing insurers and reinsurers, particularly those exploring captive insurance structures, ceding business to them or reinsuring them; and insurance intermediaries providing, or planning to provide, insurance and risk management services to corporates.
• The regulators are proposing a regulatory framework that removes or tailors several requirements that apply to conventional insurers that are not appropriate to the captive business model or its risk profile.
• HM Treasury, in its Consultation, defined two types of captive insurer – ‘Reinsurance basis’ and ‘Direct basis’.  The FCA proposes a single type of captive, which can write insurance business on both a direct basis, subject to the lines of business limitations, or on a reinsurance basis.
• Captive insurers will only benefit from the regime where they do not write certain categories of business that the FCA considers would carry additional risks of harming third parties, or that would require additional consumer protections. In particular, captives would not be permitted on a direct basis to enter contracts with, or cover, individuals or entities eligible to refer complaints to FOS, including:
  • consumers;
  • small and medium-sized enterprises (SMEs) that fall outside the Handbook definition of ‘large commercial customers’; or
  • policy stakeholders as defined in the FCA Handbook Glossary, including leaseholders under a multi-occupancy building insurance policy.
• Table 1 in paragraph 2.10 of CP26/29 provides a summary of the lines of business captives can write.
• The regulators are proposing a streamlined and proportionate approach to authorisation for captives, reflecting their more limited and lower-risk business model.
• Captive insurers will be dual-regulated firms that hold permissions to effect and carry out contracts of insurance as principal (together with any other necessary permissions).
• To encourage growth of the sector, the regulators are committing to determining complete applications within 4 to 6 weeks of receiving them. This applies to captive insurers that will carry on permissible business lines.
• Chapter 3 of the Consultation (‘Application of FCA rules, governance, supervision and fees’) sets out the FCA’s proposals on:
  • which of the Handbook rules would apply to captive insurers;
  • how the FCA proposes to hold them accountable;
  • how the FCA proposes to supervise them; and
  • its proposed fee structure.
• The table in paragraph 3.4 sets out those parts of its Handbook rules the FCA is proposing to apply or not apply to captive insurers.
• Chapter 3 also includes details of the corporate governance and accountability of captive insurers, captive management, supervision and reporting, and fees (application and periodic).
• There will be a new Glossary definition of ‘captive insurer’, with proposed amendments to the Glossary definitions of ‘retail market business’ (to exclude insurance business carried on by a captive insurer (where that insurance business is in scope of the firm’s Permissions) – effectively removing captive insurance from the scope of Consumer Duty), and ‘Solvency II firm’ (to capture a captive insurer within this definition for the purposes of the SYSC and INSPRU Sourcebooks).
• There will be a new Section SYSC 3.5 ‘Additional requirements for captive insurers’.
• Neither MIPRU nor ICOBS will apply to a captive insurer.
• The regulators’ parallel 3-month consultations will close on Wednesday 14 October 2026, with implementation expected in mid-2027, after both regulators publish their final rules and policies.
• At a later stage, both regulators intend to further consult to extend the regime to protected cell companies (PCCs) once the necessary legislation is in place.