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The UK government plans to overhaul regulation of the growing market for in-house insurance, cutting capital requirements for special entities set up by companies to protect themselves from business risks.
Large companies have made increasing use of in-house or ‘captive’ insurers in recent years, setting up entities to cover risks ranging from lawsuits to cyber attacks rather than buying external cover, partly in response to rising insurance prices.
But UK companies have been opting to set up captives in jurisdictions such as Bermuda, the Cayman Islands and Vermont instead of in London, due to lighter tax, capital and reporting requirements.
Chancellor Rachel Reeves went further than insurance market participants expected on Tuesday when she set out plans to change the captive regime as part of a suite of financial reforms designed to encourage more investment in UK financial markets.
Easing regulations for captives has been a lobbying priority for London’s commercial insurance and reinsurance market, which contributes about a third of the City’s economic output and employs 60,000 people, according to trade body London Market Group.
“We are really pleased with how far [the government has] gone,” said London Market Group chief executive Caroline Wagstaff, after the government “included a lot of things that they were minded not to include”.
For example, the Treasury now accepts the use of protected cell companies — another type of mini-insurer — which smaller companies can use without setting up a full captive, to manage more complex risks.
The government had initially opposed the use of captives by financial services firms, such as pension funds, banks and insurers, “to avoid regulatory arbitrage and minimise the potential for financial stability risks,” according to its consultation.
However, in its response on Tuesday, it said it supported the use of captives “for specific, limited purposes” such as those related to a piece of property owned by a financial services firm.
Insurance brokers also welcomed the proposal to cut down both capital and reporting requirements for captives, which they had argued were excessively onerous.
“If the insurance company is not well capitalised, ultimately, the only person that will be impacted by that is the insured — the owner of the company, said David Hogg, head of captives for Emea at Aon.
“It’s not like captives are generally transacting with members of the public that need to be protected and have all of the safeguards in place,” he added. “It’s a company trading with itself — left pocket, right pocket.”
Shell, Coca-Cola Europacific and Network Rail are among the groups that have expressed interest in using a UK-domiciled captive, according to people familiar with the discussions.
Marsh and Aon, the world’s two largest insurance brokers, run businesses managing captives for companies. These captives drew in about $140bn in combined premiums last year. The premiums paid into a captive is typically invested, allowing the company to earn investment profits.
Lower capital and regulatory requirements could prompt almost 700 captive insurers to move onshore or set up in the UK, according to research commissioned by the London Market Group.
But the total number of captives that domicile in the UK — and the revenue boost they bring for the government — will depend on the finalised rules, which are expected to be unveiled by the Financial Conduct Authority and Prudential Regulation Authority in mid-2027 following consultations next year.
In the UK, capital requirements for captives are dictated by Solvency II rules, which typically require companies to set aside more capital as collateral for future payouts, compared with popular offshore destinations. In Bermuda, for example, captives are regulated according to a risk-based capital model based on actuarial estimates of eventual payout.
Two respondents to the government consultation on captives launched last year said they could pose risks to financial stability, as happened in the 1990s, noting the “potential taxpayer burdens that could arise if captive insurers failed”.
Wagstaff said concerns over financial risks stemming from captives were ill-founded, since companies with captives are “are only putting their own balance sheet at risk”.
“The Enron captive is still alive and well and paying claims in Vermont,” she added. “So I think they’ve proved their stability.”