CP11/26 – A tailored regime for captive insurance

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Responses are requested by Wednesday 14 October 2026.

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Responses can be sent by email to: CP11_26@bankofengland.co.uk.

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Insurance Policy Division
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2: Overview

Scope of this consultation

2.1 This CP is most relevant to public and private organisations that currently use, or may consider using captive insurance, captive managers and other outsourced service providers, corporate risk managers, as well as insurance and reinsurance intermediaries (including brokers and captive advisers).

Background

2.2 In July 2025, as part of the Chancellor’s Mansion House speech on financial services reform, the Government announced plans to introduce a new UK captive insurance framework, signalling a clear commitment to making the UK the location of choice for insurance and reinsurance business.

2.3 Following that announcement, the regulators jointly confirmed their intention to proceed with the design of a new UK captive insurance regime, in line with the scope outlined by HM Treasury (HMT). The regime would expand the range of insurance services offered in the UK, support the growth of the UK economy and provide businesses with a wider set of risk management options.

2.4 This consultation paper (CP) sets out the PRA’s proposed rules and policy material for UK captive insurers (‘UK captives’ as defined in paragraph 3.6 below), developed in cooperation with the FCA and broadly aligned with the scope set out in HMT’s consultation response. The CP is issued alongside CP26/29: A tailored regime for captive insurance (CP26/29) by the FCA. The PRA’s CP covers the prudential framework for UK captives, whereas the FCA’s CP covers conduct matters.

2.5 The PRA’s policy development has been informed by extensive industry engagement to ensure the regime is proportionate and meets the needs of the industry. The PRA convened six subject expert groups (SEGs) with current/prospective captive owners from various industries, financial intermediaries specialising in captive management and representatives of the insurance industry.^{footnote [3]} In addition, the PRA held separate discussions on more complex topics with various professionals, including representatives from law firms.

2.6 This engagement highlighted a number of factors that industry considered important to the success of a UK captive insurance regime, including:

• fast-track authorisation;
• regulatory responsiveness;
• flexibility to accommodate different business models;
• tailored reporting and capital requirements; and
• flexibility in the capital resources framework.

2.7 The scope of the proposed initial regime reflects the regulators’ commitment to timely delivery of what is possible within their existing powers and the current legislative framework. An important future extension will be to include protected cell company (PCC) structures, which are expected to play a substantial role in widening access to captive insurance over time. The PRA intends to consult on inclusion of PCC captives as soon as the necessary legislation is in place to enable PCCs to operate as insurers, as outlined in Chapter 13 of this CP).^{footnote [4]}

What is a captive?

2.8 A captive is an insurance or reinsurance undertaking created and owned, directly or indirectly, by one or more industrial, commercial, financial, or public organisations. Its purpose is to provide insurance or reinsurance cover for risks of the organisations to which it belongs, or for entities closely connected to those organisations. In short, captives are used by these organisations for insuring their own risks. A captive can offer the following benefits to its parent:

• help manage insurance costs and provide direct access to reinsurance markets;
• encourage stronger risk management practices; and
• provide coverage for excluded or expensive risks.

2.9 Many UK corporates already own captives in jurisdictions outside the UK.

A tailored UK regime

2.10 This consultation covers single-parent captives (otherwise known as ’pure‘ captives): these captives are only permitted to insure or reinsure risks of their group entities and parties connected to the group.

2.11 The PRA intends to consider further captive types at later stages, as discussed in Chapter 13.

2.12 The PRA considers that single-parent captives generally pose low risks to its primary objectives of safety and soundness and policyholder protection, since the captive’s main policyholder is its parent (or other group companies). This structure results in several features:

• Alignment of interests: the interests of the captive and its group – as the policyholder – are generally very closely aligned, as single-parent captives are established to provide risk management services to group members.
• Little or no information asymmetry: captives often have access to high-quality historical claims data and insights to the group’s risks.
• Limited or no negative public externalities: risks of wider financial stability impact in case of failure are much lower due to the contained scope of the regime, with captives only permitted to insure their group and organisations closely connected to the group.

2.13 Due to the substantial differences noted above, the PRA considers that it is more appropriate to develop a separate, proportionate and tailored regime for, rather than modify, the existing limited framework for captive insurers under Solvency UK.

2.14 The PRA proposes to limit the scope of the new regime in order to exclude certain higher risk types of business that would not be compatible with the proportionate regime that is proposed. Examples of restrictions include the direct writing of compulsory lines and employee benefits, as well as a business volume cap relating to the insurance of non-group entities (see Chapter 3).

2.15 Although the PRA considers risks to its primary objectives to be low, it still needs to advance the safety and soundness objective in a way that is appropriate for UK captives. This should be achieved through the establishment of a robust baseline framework, designed to ensure:

• genuine risk transfer from the group to the captive, with appropriate pricing, reserving, risk management and other elements as applicable; and
• effective governance and clear accountability for key decisions, and seeking to address any conflicts of interest arising from the unique nature of captives.

2.16 Overall, the PRA considers that the regime scope and the baseline framework advance its primary objectives of safety and soundness and policyholder protection. Within this framework, the proposals also seek to support the development of an internationally competitive UK captive insurance regime, consistent with the PRA’s secondary competitiveness and growth objective and secondary competition objective. See Chapter 11 for a full analysis of the proposals against the PRA’s objectives.

2.17 The proposals were discussed with the Insurance Practitioner’s Panel and Cost Benefit Analysis Panel, who were broadly supportive. Feedback from the Cost Benefit Analysis Panel, together with the PRA’s own analysis, is included in Chapter 10.

Structure of the CP

2.18 The proposals in this CP are structured as follows:

• Chapter 3: Scope and tailoring of the regime
• Chapter 4: Approach to authorisation of UK captives
• Chapter 5: Approach to supervision of UK captives
• Chapter 6: Financial resources
• Chapter 7: Governance
• Chapter 8: Other areas of policy
• Chapter 9: Consequential amendments

2.19 This CP also includes the following chapters, with additional discussion questions in Chapter 13:

• Chapter 10: Cost benefit analysis
• Chapter 11: PRA objectives analysis
• Chapter 12: Other legal requirements
• Chapter 13: Looking ahead: potential development

Summary of proposals

2.20 The key elements of the proposals are summarised in Figure 1 and Table 1 below.

Approach to authorisation and supervision

2.21 To support a successful and proportionate regime, the SEGs highlighted the importance of regulatory flexibility, responsiveness and speed. This has informed the design of the regime to advance the PRA’s secondary competitiveness and growth objective, delivered through the PRA’s proposed supervisory and authorisation approach, based on the following principles:

• Decision-making to be fast and flexible: the PRA will aim to take an authorisation decision within 4–6 weeks of receiving a complete application.
• Regime will focus on maintaining strong entry-standards rather than extensive post-authorisation supervisory oversight or intervention.

2.22 UK captives will be supervised by dedicated PRA and FCA teams with the appropriate expertise, coordinated through the PRA.

The PRA’s policy documents

2.23 The proposed new regime will be delivered as follows:

• Updates to the PRA Rulebook (Appendix 1). The Rulebook contains the rules that UK captives must comply with. The updates include:
  • new bespoke Rulebook Parts that only apply to UK captives; and
  • certain existing Rulebook Parts with modifications so that they apply, either entirely or partially, to captives.
• A dedicated supervisory statement (SS) for authorisation and supervision of UK captives (Appendix 3). This document outlines guidance on the Rulebook, the PRA’s expectations of captives and clarifies the PRA’s approach to authorisation and ongoing supervision.
• The PRA has also proposed consequential amendments to the existing PRA rules and definitions relating to Solvency UK captives, to avoid confusion with the proposed regime. For clarity, these amendments are set out separately in Appendix 2 and explained in Chapter 9.

2.24 The SS is expected to be the main document for reference, supporting the PRA’s requirements in the rules for UK captives.

2.25 At this stage, the PRA will not change existing SS’s and statements of policies to explicitly exclude UK captives from their scopes. UK captives should only refer to their dedicated SS and, unless indicated otherwise, expectations set out in any other SS do not apply to UK captive insurers.

Implementation and next steps

2.26 The PRA is committed to establishing a robust and tailored regime for captives that can support a variety of business models. The regime will be introduced in two stages:

• Stage 1 – this consultation – covers proposals for single-parent captives. This 3-month consultation will close on 14 October 2026, with implementation expected in mid-2027, when the PRA publishes its final rules and policy material.
• Stage 2 will extend the regime to protected cell companies (PCCs). This work will proceed when the necessary legislation is in place. Chapter 13 outlines some questions to support the PRA in developing the PCC framework. While not part of the policy proposals, the PRA would welcome views by the consultation close date of 14 October 2026.

2.27 In addition, in Chapter 13, the PRA has asked for views on group and association captives, to gauge interest and to assess any additional risks pertaining to these structures in the context of the PRA’s objectives, for potential future policy development. Similarly, these are not part of the policy proposals, though the PRA would welcome any views by the consultation close date of 14 October 2026.

Responses

2.28 The PRA invites feedback on the proposals and additional questions set out in this consultation. Please address any comments or enquiries to CP11_26@bankofengland.co.uk by 14 October 2026. The PRA also encourages respondents to engage with the FCA’s CP26/29.

2.29 When providing your response, please tell us whether or not you consent to the PRA publishing your name, and/or the name of your organisation, as a respondent to this CP.

2.30 Please also indicate in your response if you believe any of the proposals in this consultation paper are likely to impact persons who share protected characteristics under the Equality Act 2010, and if so, please explain which groups and what the impact on such groups might be.

3: Scope and tailoring of the regime

3.1 This chapter sets out the proposed scope of the regime, including:

• how UK captives are defined;
• who UK captives can insure;
• what lines of business they are permitted to write; and
• the design principles the PRA has adopted to ensure the regime is proportionate.

3.2 The PRA considers that a captive is generally well-suited for insuring risks arising from its group’s own operations and commercial activities. However, this excludes activities involving complexities such as pensions and direct writing for individual policyholders, because these increase risks to the PRA’s primary objectives.

3.3 The proposals across all chapters of this CP are intended to be simple, proportionate and transparent, reflecting the typically lower risk profile of captives and limited capacity to pose risks to the PRA’s objectives while maintaining appropriate prudential standards.

3.4 The PRA has considered the characteristics of single-parent captive insurers and international practices in other captive domiciles in developing these proposals.

Proposal 1: Definition for single-parent captives

3.5 The PRA proposes to introduce a dedicated section of the Rulebook for captive insurers, supported by a new standalone definition of a ‘UK captive insurer’.

3.6 The new definition in the Rulebook instrument (Annex A of Appendix 1) establishes a ‘UK captive insurer’ as a distinct category of insurer, separate from Solvency UK firms, third-country branch undertakings, non-directive insurers and mutuals. Under this definition, a UK captive insurer (hereafter referred to in this consultation as ‘UK captive’) is a fully owned subsidiary incorporated in the UK, the purpose of which is to only insure risks of its group entities and material non-group undertakings which are connected to the group (see ‘material non-group undertakings’ section). This definition captures single-parent, or ‘pure’, captives.

3.7 For the avoidance of doubt, this CP does not propose any changes for third-country branches of overseas captives, which will continue to be covered under the PRA’s policy framework for insurance third-country branches.

Proposal 2: A distinct regime

3.8 The regime is designed to be separate from the Solvency UK. The proposals result in three main types of UK insurers: Solvency UK firms; non-directive firms; and UK captives.

3.9 The PRA proposes to rename the existing ‘captive insurer’ and ‘captive reinsurer’ definitions in Solvency UK, for consistency and clarity, to ‘Solvency UK intragroup insurer’ and ‘Solvency UK intragroup reinsurer’.^{footnote [6]} This is outlined further in Chapter 9.

3.10 For the avoidance of doubt, neither the proposed new regime nor the consequential amendments would introduce changes for the intragroup reinsurance vehicles that are used by many Solvency UK groups (see ‘Type of parent’ section, which discusses captives of financial services firms).

Proposal 3: Captive types

3.11 HMT’s consultation discussed two types of captives – reinsurance and direct, with reinsurance captives allowed to write insurance on a ‘reinsurance basis’ only. ‘Reinsurance basis’ means the captive would accept the risk by providing reinsurance to the commercial insurer, with the commercial insurer receiving a commission/fee for this service.

3.12 At its subject expert groups, the PRA heard that existing and prospective captive owners would not expect to operate several types of captives. The PRA hence proposes a single type of captive, which can write insurance business on both direct and reinsurance basis, subject to the lines of business limitations later in this chapter.

3.13 UK captives could write non-life business alongside some types of employee benefits business, since the latter is allowed on a reinsurance basis only and therefore such a captive would not be classified as a composite.^{footnote [7]}

Proposal 4: Lines of business for captives

3.14 The PRA proposes that UK captives would be permitted to write the following lines of business:

Table 2: Lines of business that UK captives can write

Compulsory lines

3.15 Insurance for certain lines that is required by law or regulation – eg employer’s liability or motor third-party liability – with the purpose of protecting third parties and public interest is known as ‘compulsory lines’. The PRA considers that UK captives should be able to write compulsory lines of insurance on a reinsurance basis only. The full list is available in the Policyholder Protection Part of the PRA Rulebook, under the definition of ‘liability subject to compulsory insurance’.

3.16 Restricting UK captives to writing these lines on a reinsurance basis ensures that a primary insurer, subject to the standard insurance regime in the UK, remains responsible for the claims related to these third parties. This restriction therefore is necessary for advancing the PRA’s policyholder protection objective, which extends beyond policyholders (ie typically the UK captive’s parent), covering any third-party beneficiaries.^{footnote [8]} Restricting UK captives to only cover compulsory lines on a reinsurance basis also prevents circumvention of the statutory insurance requirement through intra-group captive arrangements.

Employee benefits

3.17 HMT’s consultation and the PRA’s interactions with the SEG have demonstrated material demand for UK captives insuring the group’s employee benefits programmes. In these programmes, employers offer a package of benefits such as life and health insurance to their employees.

3.18 There is no single consistently used definition of employee benefits. In this context employee benefits comprise (see rule 1.2 in Annex P of Appendix 1 for the full list in the proposed rules):

• health/medical expenses and accident cover, provided to groups of employees;
• group life insurance (including annuities to dependants for death in service);
• group income protection (including claims in payment);
• group critical illness.

3.19 These policies are provided on a ‘group policy’ basis, and represent less complex risks, compared to offering these products directly to individuals.

3.20 However, while the UK captive’s parent (or another group member) is the policyholder, the policies are issued directly to the beneficiaries (employees) and have a potential of significantly impacting them. Therefore, the PRA considers that the risks to its policyholder protection objective are higher for employee benefits, and proposes that captives can provide employee benefits insurance coverage on a reinsurance basis only, with the employees benefitting from the protection of a primary insurer subject to the standard insurance regime in the UK.

3.21 In line with the design principles set out above, the PRA has proposed to exclude pensions from its employee benefits definition, as it considers that pension products are complex, and are hence not suitable for the proportionate captives regime, as set out in the design principles.

3.22 UK captives would be permitted to provide employee benefits coverage solely for employees of the parent undertaking and its group entities. Coverage of any non-group entities would not be permitted, since this could materially increase exposure to third parties and therefore risks to policyholder protection.

Other general insurance lines

3.23 The PRA proposes that UK captives may write other general insurance lines on both a direct and reinsurance basis. However, where a company is the policyholder but individuals (eg employees of the parent) are named as beneficiaries, such business would be permitted on a reinsurance basis only (see rule 5.2 (2) in Annex P of Appendix 1 to the CP). This may arise, for example, in certain Directors’ and Officers’ insurance covers, such as Side A cover. Restricting these arrangements to reinsurance is intended to ensure appropriate policyholder protection for the individuals concerned, noting that these individuals may also be eligible for FSCS protection.

3.24 The PRA acknowledges that certain general insurance lines, such as public liability insurance, involve third-party beneficiaries who fall within the scope of the PRA’s policyholder protection objective. These risks are not subject to mandatory insurance requirements, and any liability to third-party beneficiaries (ie claimants) arises independently of the existence of insurance. As a result, third-party beneficiaries primarily rely on the financial capacity of the parent undertaking to meet liabilities, irrespective of whether those risks are managed through an insurance arrangement. Therefore, the PRA considers that UK captives should be able to write these lines on a direct basis.

3.25 The PRA proposes that UK captives would be restricted from writing insurance business where the purpose of that business is to protect against investment risks (see rule 5.3 in Annex P of Appendix 1 to the CP). This is intended to ensure that the activity of a UK captive remains focused on the insurance of risks arising from the operations and commercial activities of the UK captive’s policyholders, rather than providing cover for fluctuations in the value or performance of investments or portfolios.

Other life insurance

3.26 In line with the design principles set out in the chapter overview, the PRA considers that UK captives should not be permitted to write life insurance policies other than defined employee benefits. Life insurance entails long-dated and complex obligations with high potential impact on individual policyholders, which the PRA considers inconsistent with the envisaged proportionate UK captive regime, given the associated higher risks to its primary objectives.

Proposal 5: Material non-group undertakings

3.27 The PRA proposes to permit UK captives to insure 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.

3.28 The PRA has observed that in many overseas domiciles single-parent captives are permitted to underwrite risks of connected material non-group undertakings where those risks arise from a close and ongoing contractual relationship with the captive’s group. This includes arrangements with closely integrated suppliers, service providers and participants in owner-controlled insurance programmes (OCIP), where the insured exposure is directly linked to the group’s business activities.

3.29 The PRA proposes to permit UK captives to insure 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 (see rule 1.2 in Annex P of Appendix 1 to the CP for the full definition).

3.30 The PRA considers that allowing UK captives to insure non-group entities may increase risks to its primary objectives as follows:

• Safety and soundness of UK captives – when captives insure risks of organisations outside their group, the alignment of interests between the captive and the insured entity may be weaker than with its group. In addition, the captive’s access to information may be more limited.
• Policyholder protection – the expansion of the scope outside the group means that a wider range of policyholders may be affected, including, for example, sole traders and contractors in large group-controlled projects.

3.31 To mitigate these incremental risks, the PRA proposes a framework structured around the most common permitted structures and supported by several safeguards, summarised in Table 3 and in the next sections.

3.32 The PRA acknowledges that the definition of ‘material contractual and financial relationships’ could be subject to broad interpretation and considers that it is up to the UK captive to determine whether it is appropriate to insure the counterparty, or some aspects of the counterparty’s business. As set out in the draft captive insurance SS (Appendix 3), the UK captive would need to:

• be satisfied that its parent and/or affiliated companies have insurable interest in the given risks;
• be satisfied that there is a well-established contractual relationship between the group and the counterparty, which outlines mutual obligations for both parties under the contract;
• assess that disruption to supplier’s ability to service the contractual relationship will result in material measurable financial losses to the group over the short to medium term. This could include:
  • investment write-downs for minority ownerships;
  • project cost overruns or delays;
  • guarantee calls or cross-default provisions;
  • intangible asset write-downs due to reputational events.
• ensure that it has the expertise and data needed for underwriting the risks; and
• consider the possible increase in concentration risk.

Permitted structures

3.33 Based on industry engagement, the PRA proposes four permitted structures for material non-group undertakings that UK captives will be permitted to insure. These are owner-controlled insurance programmes (OCIP), significant suppliers, franchisees and entities where the group hold a minority stake of at least 5%. Each of those four permitted structures would be defined in the rules: see rule 1.2 in Annex P of Appendix 1 to the CP.

3.34 The PRA considers that these permitted structures will meet most of the market needs, thus advancing the PRA’s secondary competitiveness and growth objective, but welcomes comments on any other common use cases that captives write, and on the appropriateness of the proposed safeguards. In addition, when authorising new UK captives and during supervision of existing UK captives, the PRA is open to discussing other permitted structures that may meet the definition of a material non-group undertaking.

3.35 For example, the PRA would like to understand if there is material interest from organisations in reinsuring other related third-party risks in UK captives – eg a UK captive reinsuring customer risks related to the group’s products, via fronting arrangements. If so, then the PRA would welcome views on whether the proposed regime (eg capital requirements and the 10% cap on non-group exposure) is appropriate for accommodating such arrangements.

Owner-controlled insurance programmes

3.36 An owner-controlled insurance programme, also known as a wrap-up programme, is a centralised insurance programme arranged by the owner of a major construction or infrastructure project to provide coverage for all parties working on the project, including the owner itself, the principal contractor and all tiers of subcontractors.

3.37 Rather than each subcontractor procuring its own insurance independently (which creates gaps, duplications, and inconsistent limits), the project owner ‘wraps’ all project-related risks into a single programme. When that programme is placed through a captive insurer, the owner retains the underwriting risk, controls claims management and benefits from the programme’s loss experience.

3.38 OCIPs are typically used for large-scale projects (airports, highways, power stations, major commercial developments) where:

• The number of subcontractors is high, often running into hundreds across multiple tiers.
• The aggregate exposure is substantial – total insured values on a major infrastructure project can exceed several billion pounds.
• The owner has a strong interest in uniform risk management standards across all project participants.
• Individual subcontractors may be unable to procure adequate cover in the commercial market at the limits the project requires.

3.39 The PRA considers that similar to a captive insuring group risks, there is alignment of economic incentives between the captive, the group and the programme participants. It is in the group’s interests that the project is successful and that insurance cover is appropriate and effective. This supports including OCIPs within the UK captive regime, subject to the appropriate safeguards.

Minority ownerships

3.40 In this context, minority stake ownerships refer to undertakings where the UK captive’s group holds a limited ownership interest, but does not have control, significant influence or an ownership interest of 20% or more.^{footnote [9]} However, if the group holds at least 5% interest in the undertaking, then the PRA considers that there is sufficient alignment of interests to permit the UK captive to insure the undertaking’s risks,^{footnote [10]} subject to the appropriate safeguards. This structure is particularly useful for facilitating insurance of joint ventures.

Suppliers

3.41 Suppliers are often a vital component for operations of industrial and commercial groups, especially in sectors with few alternative providers. Disruption at a significant supplier can therefore directly impact the captive’s group. The PRA considers that a UK captive could be well-placed to underwrite the risks in supplier’s operations that could directly affect the group’s business and result in significant financial impact, thereby helping to bolster supply chain resilience.

3.42 The PRA recognises that supply chains are often complex, and that the proposed definition only covers direct suppliers, excluding any sub-contractors. The PRA welcomes comments on this aspect and the significance of this exclusion for users.

Franchisees

3.43 A franchise is a contractual arrangement whereby one party (the franchisor) grants another (the franchisee) the right to operate under the franchisor’s brand and business model, in exchange for fees and compliance with specified standards.

3.44 In sectors where brand and distribution are extended through franchise networks, a major incident at a franchisee can cause direct financial or reputational harm to the parent organisation. In such circumstance, the franchisee could meet the definition of a non-material group undertaking. A franchisor’s captive could help manage these exposures by underwriting specific risks within a franchisee’s operations that would directly affect the group (for example, covering events that threaten the brand or continuity of franchise revenues).

Safeguards

Volume cap

3.45 The PRA proposes to limit total business written in respect of all material non-group undertakings – other than OCIPs – to 10% of the UK captive’s overall business volume, based on the lower of net written premiums or net insurance liabilities for any given financial year (see rules 1.2 and 5.6 in Annex P of Appendix 1). This restriction limits the extent of the additional risks that may arise through non-group exposures. The PRA will consider requests to temporarily exceed the cap, in line with the statutory waivers process.

3.46 As discussed in the OCIP section above, the PRA considers that the alignment of interests between the OCIP and the UK captive/its group is usually strong, and hence presents low additional risks to its primary objectives. The PRA is therefore proposing not to include OCIPs in the 10% cap.

Financial services compensation scheme (FSCS) limit

3.47 The PRA considers that FSCS exposure is a strong indicator for impact on policyholders and the policyholder protection objective, which is not aligned with the envisaged scope and calibration of the proposed UK captives regime. The PRA proposes that UK captives are permitted to insure material non-group undertakings that have an annual turnover of under £1 million on a reinsurance basis only; insurance of MNGUs with annual turnover in excess of £1 million is permitted on either a direct or a reinsurance basis. Businesses and sole traders (that are not part of the group – see the ‘FSCS implications’ section) under this threshold are eligible for FSCS protection.^{footnote [11]}

Financial Ombudsman Service (FOS) eligibility

3.48 As outlined in the FCA’s CP26/29, captives would be permitted to insure material non-group undertakings that are eligible for the FOS, on a reinsurance basis only. Currently, small and medium enterprises are eligible for FOS if:

• Turnover is below £6.5 million, and at least one of:
  • Fewer than 50 employees or
  • Balance sheet total is below £5 million.

Proposal 6: Type of parent

3.49 The PRA considers that with appropriate safeguards, UK captives can be used by a variety of organisations – commercial, financial or public.

3.50 The PRA has considered the appropriateness of financial services firms (eg banks, (re)insurers, pension funds, superfunds) using UK captives and proposes to permit this. Financial services firms would be able to use a UK captive to retain and manage their operating risks and associated costs, enabling them to achieve similar benefits to other organisations using captives.

3.51 As outlined above in paragraph 3.25, the PRA proposes that UK captives would be restricted from writing insurance cover to protect against investment risks. These risks form part of the core balance-sheet exposures of financial services firms and are not contingent or insurance-related risks. The UK captives framework has not been designed to accommodate such exposures.

3.52 In line with the approach of financial services firms being able to insure their operating risks only, the PRA proposes that UK captives of groups with other (re)insurers would not be permitted to reinsure risks arising from the other (re)insurers’ commercial insurance activity, such as risks underwritten for third-party policyholders (see rule 4.5 in Annex P of Appendix 1).

Group supervision – insurance

3.53 Regarding insurers’ usage of UK captives, the PRA proposes to update the Group Supervision Part of the PRA Rulebook, to ensure that captives are fully consolidated within groups where there is at least one Solvency UK insurer in the group, in addition to a UK captive. This proposal:

• maintains the core principles of group supervision in Solvency UK, which ensure a single economic view of the group, capturing all relevant risks and thereby advancing the PRA’s primary objectives; and
• introduces a proportionate approach regarding group supervision for groups that contain captives but no Solvency UK insurers and therefore risks to the PRA’s primary objectives are lower. The PRA proposes to limit group supervision in this scenario to monitoring of intra-group transactions and exposures as part of the regular reporting templates.

Proposal 7: Type of company

3.54 Based on SEG feedback, the framework proposed in this consultation anticipates establishment of captives as companies limited by shares. The PRA considers that the structure of companies limited by guarantee (CLG) is not well suited for single parent captives, noting that CLGs (for example mutuals) would be more appropriate for group and association captives. Therefore, the PRA proposes that the new regime would not permit CLGs.

FSCS implications

3.55 The UK is distinct among captive jurisdictions for its wide-ranging, statutory framework for policyholder protection, underpinned by the Financial Services Compensation Scheme (FSCS). The FSCS provides compensation to policyholders in defined circumstances following an insurer default, funded by levy contributions from participant insurers.

3.56 The PRA considers the FSCS would generally not be available to protect the insurance business carried on by single-parent captives. This is because the captive's direct policyholders would either be entities within the same group as the captive, or they would be non-group undertakings with more than £1 million in annual turnover – each of which is excluded from FSCS protection under the PRA's rules.^{footnote [12]} Further, in respect of fronting arrangements, the PRA notes that reinsurance contracts are not FSCS-protected.^{footnote [13]}

3.57 UK captives would however still be FSCS participant insurers because – while the PRA considers that UK captives would have no reasonable likelihood of writing FSCS-protected business under its proposals – there may be some circumstances under which a third-party could be eligible to claim FSCS compensation in respect of a protected contract of insurance issued by a UK captive.^{footnote [14]} As FSCS participants, UK captives would be required to pay the 'base costs' part of the FSCS levy, which would be a small annual amount based on the periodic fees payable to the PRA and the FCA (as proposed in their separate CPs).^{footnote [15]}

3.58 However, the PRA considers that UK captives would generally be exempt from paying the ‘compensation costs’ and ‘specific costs’ parts of the FSCS levy for the reasons set out above. To qualify for an exemption, UK captives would need to confirm in writing with FSCS Limited that they do not conduct business that could give rise to a protected claim by an eligible claimant and have no reasonable likelihood of doing so.^{footnote [16]} The PRA does not propose to require any regular reporting on possible FSCS exposures from UK captives, on the grounds of proportionality.^{footnote [17]}

4: Approach to authorisation of UK captives

4.1 This section sets out the PRA’s proposed expedited approach to authorising UK captives. This approach is designed to be streamlined and supportive, with the aim of determining complete applications within 4–6 weeks, subject to completeness and no material issues arising. The PRA encourages early engagement and will provide support to applicants throughout the process to help ensure submissions are high quality and well developed at the point of application.

4.2 The section covers the following elements and should be read in conjunction with the FCA’s proposed approach to captive authorisation as set out in CP26/29:

• the authorisation process, including preliminary (initial enquiry) discussions and pre-application engagement between the regulators and prospective applicants;
• core documentation and evidence applicants would be expected to submit;
• regulated activities for which UK captives may apply for permission;
• limitations that would apply to UK captives;
• PRA’s proposed approach to assessing applications;
• indicative timelines and fee principles; and
• other authorisations related considerations, including governance, reporting and relevant Rulebook provisions.

Proposal 1: The authorisation process

4.3 A firm wishing to operate as a UK captive would require PRA authorisation, with the FCA’s consent, and would therefore be dual-regulated. The PRA would lead the process and coordinate with the FCA throughout. Applicants would need to confirm the functions the proposed captive would perform, the permissions sought and the limitations that would apply and provide evidence that the proposal meets the PRA and FCA Threshold Conditions, including through a credible business model, appropriate governance and controls and adequate financial resources.

4.4 To achieve their objective of setting up as a UK captive, firms should be ready, willing and organised. It is important for firms to understand the authorisation process and regulatory expectations before submitting an application to the PRA. This will help to ensure that the application submitted is of high-quality and as complete as possible. The high-level proposed end-to-end pathway from preliminary (initial) discussions/pre-application engagement to authorisation is set out below.

Preliminary (initial enquiry) and pre-application engagement stages

4.5 Before submitting a formal application, applicants can choose to engage with the PRA and FCA to confirm scope, identify key issues and support a complete application. This is voluntary for applicants and not a regulatory requirement. The aim of these confidential discussions would be to identify potential problems early and prevent unnecessary work, ultimately helping to make an application as complete as possible facilitating a faster assessment once it has been submitted.

4.6 Preliminary (initial enquiry) engagement would usually take place early and cover the proposal’s key features and any issues where potential applicants are seeking early feedback from regulators. For example, this may take the form of an initial scoping discussion to assess whether early proposals align with PRA regulatory expectations, including the proposed ownership, financial strength and location of the applicant. The PRA would expect to offer a named contact person to support these discussions.

4.7 The pre-application engagement stage consists of a process through which applicants can develop and refine their proposals. Firms may provide draft materials at this stage, such as a high-level business plan which includes the business model overview, target risks, ownership and governance; and high-level financial projections. The PRA will engage with firms to assess the maturity of the business plan and identify any issues requiring further work.

4.8 An overview of the PRA’s pre-application engagement process for insurers is set out on the New Insurer Start-up Unit webpage. For UK captive applications, the PRA will apply this process proportionately, with the number of stages, required engagement and pace of progression tailored to the specific circumstances, complexity and risk profile of each applicant.

Submitting a formal application

4.9 Applicants intending to submit a formal application will be able to do so via email to the PRA’s New Insurer Start-Up Unit, the details of which will be made available on the New Insurer Start-up Unit webpage. The submission would need to include an application form (a bespoke form will be available on the PRA’s Authorisations webpage) and supporting evidential documentation. Applicants would be expected to ensure that submissions are complete, internally consistent and supported by credible evidence.

4.10 Where an application is received that lacks the core material information required to enable an initial assessment, the PRA and FCA would not treat it as a valid application. In such cases, the application would be returned, and the 4–6 weeks assessment period would not commence. Examples may include applications that do not clearly specify the permissions sought, lack a credible business plan or feasibility study, or omit key information on governance, ownership, or financial resources.

4.11 The above is distinct from an application that is considered incomplete but nevertheless contains sufficient information to be treated as duly made. In those circumstances, the regulators would proceed to assess the application but it would be subject to longer assessment timelines. Examples may include applications where supporting documentation is partially missing, assumptions in the business plan require clarification, or further detail is needed on risk management, capital adequacy, or operational arrangements.

Proposal 2: Core documentation and evidence requirements

4.12 The PRA proposes to use a streamlined application pack tailored to UK captives. The pack would be based on existing authorisation requirements for insurers, but adapted to reflect the features of captive business and to avoid requests for unnecessary information. The PRA would nevertheless retain the ability to request additional information where needed to assess a particular application.

4.13 Applicants would be asked to complete a bespoke UK captive application form, including core details such as the applicant’s name, address, professional representatives, key contacts, legal status, incorporation details, regulated activities and limitations applied for.

4.14 The PRA would also request information on the proposed business that applicants should already possess, for example as part of a feasibility study. The PRA would be content to receive on submission of a formal application, the final parent company board-approved versions of all relevant documentation in their original form where these clearly show the required information. An indicative list of the documentation likely to be required is set out below:

4.15 The PRA would generally expect documents accompanying the application to be in final form, or with a clear explanation and plan to finalise where this is not the case.

Proposal 3: Regulated activities

4.16 Applicants would need to specify in the application form the regulated activities for which authorisation is sought and request only those permissions necessary for the proposed business. Requested permissions would need to be consistent with the captive’s business model, lines of business and operating arrangements. The PRA would assess the permissions sought alongside the proposed limitations and could restrict or refine them where necessary to ensure that the firm remains within the scope of the captive regime.

4.17 Table 5 below sets out an indicative list of regulated activities that will be included in the application form for applicants to select from.

Proposal 4: Limitations applicable to UK captives

4.18 As part of the application, the PRA proposes applicants will be asked to apply for limitations under section 55F(3) of FSMA such that its regulated activities are restricted in the manner set out in the Captive Insurers – General Provisions Part of the PRA Rulebook (see Annex P of Appendix 1) and in particular:

• Chapter 4 (General Restrictions of Activities and Business); and
• Chapter 5 (Specific Restrictions of Activities and Business).

4.19 The wording of these limitations will be set out in the application form and applicants would need to confirm that they are applying for them. The limitations will reflect the business profile of a UK captive, for example, it could set out that the UK captive can only insure risks related to its parent, other group members and material non-group undertakings.

Proposal 5: Approach to assessment

4.20 Threshold Conditions, as set out in FSMA, cover legal status, location of offices, prudent conduct of business, suitability, and effective supervision. To authorise a firm the PRA needs to be satisfied that the Threshold Conditions are met and will continue to be met and to have received consent from the FCA.

4.21 The PRA’s assessment would focus on whether the applicant has a business model that is appropriate for a UK captive, including a clearly defined scope of business and counterparties; governance, risk management and controls that are proportionate to its risk profile; adequate financial resources, including capital, and reinsurance where relevant; an ownership, source of funds and control structure that does not impede effective supervision; and the ability to produce credible regulatory reporting from the point of authorisation.

4.22 Because UK captives would be subject to restrictions on their activities and business model, the PRA considers that, in most cases, they would pose lower risks to the PRA’s objectives than many other insurers. The PRA therefore proposes to take a correspondingly proportionate approach to assessing applications, including more focused evidence requirements and, where appropriate, reliance on attestations.

Proposal 6: Indicative timelines and fee principles

4.23 The PRA proposes to support faster authorisations for UK captives through structured pre-application engagement, tailored information requirements and early identification of key issues.

Timelines

4.24 Subject to the completeness of the application and its complexity, the PRA (and FCA) would aim to make a joint end-to-end decision (from the point of receipt of a complete application through to decision stage) within 4–6weeks. This period does not include preliminary (initial enquiry) discussions or pre-application engagement. Where an application is unusually complex, raises material issues during the assessment, or is precedent-setting, applicants should expect a longer review period. The PRA would aim to indicate the likelihood of such circumstances during preliminary discussions where possible, to provide confidence in expected assessment timescales.

Application and periodic fees

4.25 The PRA proposes a fee structure for UK captive applications comprising £5,000 payable on submission of an application for authorisation and annual periodic fees of £1,030, made up of the minimum fee of £600 plus a flat annual fee of £430.^{footnote [19]}

4.26 FCA application fees of £2,820 and a flat annual fee of £600 are also payable, please refer to CP26/29 for details.

4.27 Fees set at the point of initial authorisation may be revised over time to reflect any changes in the applicable fee framework. The PRA (and FCA) consults annually, on any proposed adjustments to specific fee rates and fee blocks. Finalised fee schedules are formalised and published in a subsequent Policy Statement prior to the commencement of each new fee year.

4.28 Fees payable to the PRA will be collected by the FCA, who acts as the PRA’s collections agent.

Proposal 7: Other authorisations-related considerations

Governance and Senior Managers

4.29 The PRA proposes that UK captives should meet the same fundamental governance standards as other PRA-authorised insurers, but applied on a proportionate basis. Applicants would need to demonstrate an appropriately skilled governing body, and clear allocation of responsibilities under the Senior Managers and Certification Regime.^{footnote [20]} UK captive boards would need to retain sufficient oversight over outsourced activities and demonstrate decision-making capability to manage those arrangements and meet applicable expectations. The PRA’s proposals on governance are set out further in Chapter 7 of this CP.

Ongoing supervision and reporting

4.30 For authorisation purposes, applicants should demonstrate that the proposed UK captive would be able to produce the minimum regulatory reporting required from the point of authorisation. More generally, the PRA would expect UK captives to maintain systems, controls and oversight arrangements that are appropriate to their size, complexity and risk profile, and that support ongoing supervisory engagement. The PRA’s proposals on reporting are set out further in Chapter 5 of this CP.

Proposal 8: Rulebook Parts

Notifications

4.31 The PRA proposes to amend rule 11.1 of the Notifications Part of the PRA Rulebook (see Annex M of Appendix 1) so that it applies to a UK captive. Chapter 11 Conduct Rules: Notifications of the Notifications Part requires firms to make notifications to the PRA in certain circumstances and in certain ways, including if a firm takes disciplinary action against a person relating to any action, failure to act, or circumstance that amounts to a breach of any conduct rule. The application of these rules is important to ensure the PRA can meet its statutory objectives.

Change in Control

4.32 The PRA proposes to amend rule 1.1 of the Change in Control Part of the PRA Rulebook (see Annex B of Appendix 1) so that a captive is exempt from the annual controller’s report as the PRA does not consider this report to provide significant benefits to the supervision of UK captives.

4.33 The Change in Control notification requirements in FSMA and the PRA Rulebook would continue to apply to UK captives.

Close links

4.34 The PRA proposes that a captive shall be exempt from the Close Links Part of the PRA Rulebook (see Annex C of Appendix 1) as the PRA does not consider the information required in this Part of the Rulebook to provide significant benefits to the supervision of captives.

5: Approach to supervision of UK captives

5.1 The PRA proposes a supervisory approach for UK captives underpinned by three design features:

• a strong authorisation gateway, with appropriate limitations and permissions set at entry;
• an expectation that captives remain within these parameters over time; and
• a largely reactive, portfolio-based supervisory approach following authorisation.

5.2 This is a bespoke approach tailored to UK captives as outlined below.

Proposal 1: Role of supervision

5.3 Under the proposed regime, the PRA would focus on ensuring that captives continue to meet the Threshold Conditions & Fundamental Rules (see paragraph 4.20 and Chapter 8) applicable to all insurers, operate within the scope of their permissions, and do not give rise to risks that could affect the PRA’s primary objectives.

5.4 The PRA proposes to classify UK captives as Category 4 firms (the lowest categorisation of insurance firms based on their potential to cause disruption to the UK financial system by failing) ^{footnote [21]} with further modifications made to its supervisory approach, reflecting their limited capacity to cause disruption to the UK financial system individually or collectively. Consistent with this classification, the PRA does not propose to apply the full risk element framework used for commercial insurers. Instead, supervisory activity would be calibrated to reflect the distinct size, complexity, and risk profile of captives relative to commercial insurers.

5.5 The PRA proposes to adopt a reactive, data-driven, and trigger-based approach to supervising UK captives. While not dissimilar to the PRA’s model for supervising its smallest insurers, this approach will be even more proportionate, recognising the distinct risk profile of captives.

5.6 Under this approach, supervisory activity would generally be initiated where there is evidence of potential risk. This may arise, for example, from material changes in reported financial metrics, notifications of changes in ownership, governance, or business model, or indications that a firm may be operating outside the scope of its permissions.

5.7 The PRA proposes to monitor UK captives on a portfolio basis, using data submitted by firms to identify trends and potential areas of concern (see 'Use of reporting and data’ proposal below). Firm-specific supervisory engagement would typically occur only where data or notifications by the firm indicate potential risks to the Threshold Conditions being met, or where a firm proposes a material change to its business plan or permissions. However, UK captives would still be expected to operate in accordance with the PRA’s Fundamental Rules for firms including the need to disclose to the PRA anything which the PRA would ‘reasonably expect notice’ (see Chapter 8).

5.8 The PRA notes that UK captives would always be able to contact the PRA on their own initiative to discuss any new business plans.

5.9 The PRA proposes to not apply certain elements of its typical supervisory framework in full to UK captives, where this would not be proportionate to their risk profile. In particular, the PRA does not propose to apply the full suite of supervisory tools typically used for commercial insurers as a matter of course.

5.10 However, the PRA would still retain the ability to deploy such supervisory tools where necessary. This includes the ability to request additional information, engage with firms where risks are identified, and take supervisory action where a firm may no longer meet the Threshold Conditions.

5.11 The PRA considers that this approach is consistent with the proposed overall supervisory model, which places greater emphasis on the authorisation process and less reliance on ongoing firm-specific supervision. The PRA considers that this is appropriate given the intragroup nature of most captive risks, the limited exposure to third-party policyholders, and the relative simplicity of captive business models compared to commercial insurers.

Proposal 2: Use of reporting and data

5.12 The PRA proposes to use simplified annual regulatory returns and statutory financial information to monitor UK captives on an ongoing basis. This would support the identification of potential risks, including through changes in capital, financial performance, or business activity. The approach would also be in line with PRA’s proposed reactive approach to supervision, supporting effective monitoring while limiting the administrative and supervisory burden on firms.

5.13 To ensure simplicity and to minimise costs to captives, compared to Solvency UK reporting, UK captives will be required to submit a streamlined annual regulatory return, comprising the following information:

• basic company information;
• a streamlined balance sheet including solvency calculations;
• a simplified P&L account, showing underwriting results at Line of Business level; and
• capital activity.

5.14 In addition, UK captives would be required to submit their full audited annual statutory accounts.

5.15 The return will be accounting standard neutral, with captives required to base these upon their statutory audited annual accounts, irrespective of whether these are prepared on a IFRS or UK GAAP basis, and will be based on the same time period as the statutory return. Captives will be required to submit the regulatory return alongside their annual audited accounts within 70 business days of their year-end, as set out in rule 2.4 in Annex S of Appendix 1 of this CP.

5.16 The PRA notes that this means that these returns will not be strictly comparable across the UK captive population. While reliance on statutory values limits full comparability and complicates interpretation (particularly for insurance liabilities), a single template improves consistency in key metrics through common regulatory definitions (eg, written premiums). Remaining differences are acceptable given the low risks to primary objectives from the proportionate UK captive regime. In practice, the PRA expects most UK captives will be UK GAAP reporters, for which minimal adjustments will be required from their statutory accounts to the regulatory return.

5.17 Appendices 4 and 5 contain the proposed regulatory templates and the reporting instructions respectively. While the templates in the appendix are in Excel format for consultation purposes, the PRA proposes that the final templates would be in the eXtensible Business Reporting Language (XBRL) format, which is aligned with best practices of data security. It is also consistent with regulatory reporting by other PRA-authorised firms. The draft XBRL formats of the templates will be published in due course.

5.18 The PRA proposes that captives submit the regulatory returns via the Bank of England Electronic Data Submission (BEEDS) portal, similar to all other PRA regulated firms.^{footnote [22]}

6: Financial resources

6.1 Financial resource requirements aim to ensure UK captives meet their obligations as they fall due and function effectively as group risk management vehicles. The PRA’s proposed approach to financial resources for UK captives seeks to ensure that firms maintain a credible and transparent view of their financial position, including their assets, liabilities and capital resources. The PRA considers that a simple calibration of capital requirements, supported by proportionate eligibility criteria for capital resources, would provide an appropriate minimum standard while avoiding unnecessary complexity and cost for UK captives.

6.2 The proposed rules relating to the proposals in this chapter are set out in Annex Q of Appendix 1.

Proposal 1: Valuation of assets and liabilities

6.3 The PRA proposes that UK captives would be required to prepare a streamlined regulatory balance sheet for inclusion in the annual regulatory return to the PRA.

6.4 The components of a UK captive’s regulatory balance sheet would be based largely on its statutory financial statements (prepared under UK GAAP or IFRS). The PRA considers that this approach is sufficient to advance its primary objectives, given the limited scope and lower risk profile of UK captives. Under the proposals, assets and liabilities would be recognised and measured in accordance with relevant accounting standards. This reduces the potential burden on UK captives by aligning regulatory reporting with the accounts prepared for statutory reporting purposes, and which will be subject to annual statutory audit.

6.5 In particular, the PRA proposes that UK captives would be required to maintain assets sufficient to cover its liabilities, in accordance with the following:

• The regulatory values of assets would be as per the statutory valuation, with the exception of intangible assets and deferred tax assets that rely on future profitability, which would not be recognised. The PRA does not consider these suitable for meeting UK captive insurance obligations given their valuation uncertainty and lack of marketability. Further, any defined benefit pension fund assets of the UK captive would not be recognised.
• Parental support arrangements and letters of credit may be recognised on the regulatory balance sheet at their face value where they meet the criteria in PRA rules.
• The regulatory value of insurance liabilities, other liabilities and reinsurance recoverables would be as per the UK captive’s statutory valuation.

6.6 The PRA notes that the construction of the regulatory balance sheet based on statutory values, allows for flexibility in the approaches that UK captives may use in the statutory valuation of assets and liabilities. The accompanying draft captive insurance SS (Appendix 3) sets out PRA expectations on what UK captives should consider when preparing the regulatory balance sheet, including with respect to the calculation of insurance liabilities.

Proposal 2: Capital requirements

6.7 The PRA proposes that UK captives would be required to hold regulatory capital, in support of its primary objectives. The PRA considers that a UK captive should be able to absorb a reasonable degree of losses to continue meeting its obligations and to support effective risk management for policyholders.

6.8 In light of the generally lower risk profile of UK captives and their limited scope of business, the PRA proposes to calibrate the capital requirements for UK captives (‘captive capital requirement’/CCR) using factors of 10% applied to key volume measures, alongside an absolute floor.

6.9 The CCR would be calculated by adding: (i) a baseline requirement of £100,000 to be met with Tier 1 capital resources; and (ii) any applicable additional capital requirement which can be met with Tier 1 or Tier 2 capital resources. The additional capital requirement would be calculated as the extent to which the higher of (i) 10% of the UK captive’s net written premiums; and (ii) 10% of the UK captive’s net insurance liabilities, exceeds the baseline requirement. For the purposes of this calculation, ‘net’ means after reinsurance, consistent with the proposals elsewhere in this chapter on the regulatory balance sheet and the recognition of reinsurance.

6.10 The PRA considers that calibrating the additional capital requirement by reference to net written premiums and net insurance liabilities provides a proportionate link to a captive’s risk profile. Net insurance liabilities capture the scale of existing insurance obligations, while net written premiums provide a forward-looking indicator of changes in business volume and uncertainty, including where a UK captive grows rapidly or adds new coverages. The PRA considers that applying a factor to each measure, and using the maximum of the results, provides a simple safeguard against under-capitalisation across different UK captive business models. For example, UK captives that hold relatively higher reserves for long-tail liabilities compared to those writing shorter-tail or lower-severity risks.

6.11 The PRA considers that a £100,000 absolute floor is needed within the CCR to support the stable operation of smaller UK captives, where a factor-based calculation alone may be insufficient to protect against volatility experienced on a small portfolio.

6.12 The PRA notes that UK captives may provide a wide range of coverages for their policyholders. In particular, UK captives may write risks not offered in the commercial market, or risks with limited historical experience, where uncertainty around loss outcomes is higher. UK captives may also write a small number of lines of business and so be concentrated towards certain risks. In view of this, the PRA proposes a rule requiring UK captive boards to consider if the UK captive should hold capital resources in excess of the CCR. UK captives would be required to provide information about this exercise to the PRA upon request. The accompanying draft captive insurance SS sets out proposed PRA expectations on what UK captives should consider when performing this exercise.

Proposal 3: Capital resources

Overview

6.13 A UK captive's capital will be used to support the claims of other group members and material non-group undertakings. Therefore, in many cases, the PRA expects that the group members would have an incentive to provide support to the UK captive. The PRA recognises that this alignment of interests may not hold in all cases, especially in stressed situations. Nevertheless, the scope of the proposed regime is such that the risks of a failure are likely to be limited to the UK captive's group and any material non-group undertakings.

6.14 The PRA proposes:

• a two-tiered capital structure for UK captives;
• for Tier 1, to comprise high-quality paid-in capital only (eg, ordinary share capital, retained earnings) subject to conditions in PRA rules (Annex Q of Appendix 1), and be used to meet the baseline capital requirement and the additional CCR;
• for Tier 2, to comprise contingent capital support in the form of letters of credit and parental/group support agreements (sometimes known as parental guarantees), subject to conditions in PRA rules (Annex Q of Appendix 1), and be used to meet the additional CCR;
• to allow the use of intra-group loan-back arrangements, provided that these are not used to meet the CCR; and
• to require UK captives to keep a record of capital activity and compliance with PRA rules and expectations, and to provide this information regularly in their annual reporting templates (Annexes Q and S of Appendix 1).

Tier 1 capital

6.15 The PRA’s purpose in setting Tier 1 requirements is to establish a baseline level of financial strength for the captive as a regulated insurer by ensuring that the capital floor is met with paid-in capital available to absorb losses.

6.16 The PRA proposes that only high-quality paid-up capital (for example ordinary share capital, share premium and retained earnings) would qualify as Tier 1 and could be used to meet both the capital floor and the additional CCR.

6.17 To ensure high quality of capital, the PRA proposes that Tier 1 instruments be subject to several conditions in PRA rules. For example, these conditions outline that Tier 1 capital resources must be fully paid-up, perpetual, and able to absorb losses ahead of other claims, with distributions that are fully discretionary. The PRA expects that the vast majority of ordinary shares for UK captives would meet these requirements.

Tier 2 capital

6.18 The PRA proposes to permit captives to recognise letters of credit and parental/group support agreements (forms of contingent capital) as Tier 2 capital for the purpose of meeting the additional CCR, reflecting international captive practice and industry feedback on the importance of capital flexibility. To advance the PRA’s primary objectives, the proposed rules set out objective conditions that support the availability of the contingent capital items, including in times of stress. Tier 2 instruments would not be permitted to meet the capital floor given their lower capital quality.

6.19 In this context, a letter of credit is a binding promise from a bank (the issuer, based on instructions from the captive’s parent or other members of the group) to the UK captive (as the sole beneficiary) to pay the UK captive up to a specified amount, when requested by the UK captive in line with the pre-agreed terms. A parental or group support agreement, sometimes known as a parental guarantee or a capital maintenance agreement, is an arrangement between the parent undertaking (or another group entity) and the UK captive, requiring the parent or the group entity to inject cash in the UK captive upon the UK captive’s request. While letters of credit are commonly used and standardised, parental support agreements come in a variety of forms.

6.20 The PRA recognises that the proposed contingent capital items may offer less protection than more traditional forms of capital. For example, the loss absorbency offered by parental support agreements in particular may be correlated with the group’s condition in stress. This means that a parent may be less willing to stand behind its commitment or a captive may be less willing to make a call for support when needed. For this reason, the PRA proposes that Tier 2 recognition should be subject to clear, objective rule conditions that support availability including in times of stress. The PRA also proposes to set supporting supervisory expectations focused on reliability and usability in practice.

6.21 The PRA proposes that letters of credit and parental support arrangements will only count as Tier 2 capital if they meet the following conditions in PRA rules (Annex Q of Appendix 1):

• must be available on demand, so that funds can be drawn down when the UK captive needs to meet its obligations;
• the terms do not impose any conditions to be satisfied (other than submitting a valid demand for payment), meaning that the UK captive has a clear and unconditional and right to payment;
• the terms permit submission of a valid demand for payment electronically;
• the terms require payment to be received by the UK captive no later than the end of the working day following a valid demand;
• the UK captive is not required to repay any amounts paid to it, or provide any collateral relating to the transaction;
• the items are not subject to set-off, netting or other arrangements that would undermine their capacity to absorb losses;
• must be legally binding, enforceable and cannot be withdrawn or amended without the prior consent of the UK captive. For example, letters of credit would need to be irrevocable;
• must not be structured so that they can be cancelled, withdrawn, terminated or allowed to expire at short notice where this would, or could reasonably be expected to, result in the UK captive breaching (or being likely to breach) its capital requirements;
• the amount recognised should reflect the actual funds that would be available to the UK captive in the event of a call; and
• the amount is based upon prudent and realistic assumptions.

6.22 The PRA has also proposed baseline risk management practices in the draft captive insurance SS (Appendix 3), to mitigate risks around reliability of contingent capital support in stress. For example, this includes expectations around regularly assessing counterparty risks and renewal arrangements.

Other related provisions

6.23 In some jurisdictions, captives use intra-group loan-back arrangements as a financing mechanism, whereby funds are lent to the parent or other group entities. Based on SEG feedback and international practices, the PRA proposes to allow loan-backs provided the UK captive meets its CCR. This reflects the importance of flexible liquidity and capital management for captive owners.

6.24 However, the PRA recognises that loan-backs may create some risks, including credit exposure to a group counterparty and the risk that funds are not available when needed, and therefore expects that loan-backs are appropriately managed. The PRA proposes to address these risks primarily through expectations around arrangements set out in the draft captive insurance SS, including but not limited to:

• loan-backs are clearly documented (including any call or early repayment rights);
• UK captives manage the liquidity implications and assess whether expected cash flows are sufficient to meet liabilities and expenses as they fall due, including under stress;
• UK captives consider the risk of funds becoming trapped elsewhere in the group; and
• that governing bodies review loan-back arrangements regularly to ensure they remain consistent with the UK captive’s liability profile and liquidity needs.

6.25 The PRA does not propose to permit UK captives to recognise subordinated debt as regulatory capital. Industry engagement suggests very limited practical use of such instruments by UK captives themselves, due to cost and complexity considerations. The PRA considers that the proposed other mechanisms (such as parental support) better reflect captive capital management in practice and should meet the market’s needs.

Capital activity monitoring

6.26 The PRA does not propose to require prior permission or notification for capital activity such as issuances, redemptions etc., reflecting the proportionate design of the framework, the low risks to the primary objectives, and the need to use PRA resources in an efficient and economical way. Instead, the PRA proposes to monitor such activities through annual reporting, providing firms with greater flexibility and reducing administrative burden, while maintaining appropriate supervisory oversight.

6.27 UK captives would complete a short ‘capital activity’ template in the annual return, setting out capital activity during that reporting year (eg share issuances and buy-backs, and any additions, reductions or drawdowns of letters of credit, parental guarantees and loan-back arrangements). The return would also include a declaration on whether the UK captive complied with the PRA’s capital resources rules and supervisory expectations during the reporting year.

7: Governance

7.1 The PRA expects the boards of UK captives to take decisions in the best interests of the captive as a regulated entity. This expectation reflects the PRA’s broader approach to the UK captive regime, which is designed to be proportionate to the lower risk profile of captives. In line with the PRA’s primary objective, this means that directors should ensure that the firm is managed in a prudent manner, consistent with the PRA’s rules and expectations. While captives are often established to serve the risk management needs of their parent groups, boards should not treat the interests of the parent as determinative where this would be inconsistent with the captive’s safety and soundness or its ability to meet regulatory requirements.^{footnote [23]} Captive board members must also be mindful of their duties under the applicable company law requirements.

7.2 The PRA is adopting an outcomes-focused approach to governance for UK captives, consistent with the principles set out above. In this regard, the alignment between the commercial interests of a UK captive and its parent helps to support positive prudential outcomes. At the same time, the PRA considers the potential for conflicts of interest between the UK captive and its parent (given its role as owner and policyholder), particularly in times of stress, need to be appropriately managed.^{footnote [24]} Consistent with the draft captive insurance SS (see Appendix 3), the PRA therefore places emphasis on effective board oversight, appropriate challenge, clear ownership of key risk and capital decisions, and senior accountability as mitigants.

7.3 In line with the above, the PRA proposes to amend (see Annexes G, I - L of Appendix 1):

• rule 1.1 of the Insurance Senior Managers Regime – Applications and Notifications Part of the PRA Rulebook, so that UK captive senior managers are included;
• rule 1.1 of the Insurance – Conduct Standards Part of the PRA Rulebook so that UK captives are now in scope; and
• rule 1.1, 4.1 (1) and 4.1(2) of the Insurance – Fitness and Propriety Part of the PRA Rulebook to both put UK captives in scope, and account for the fact that they will not have person(s) performing key/certified functions. The latter amendment to exclude these references have also been made in the Insurance – Allocation of Responsibilities Part.

7.4 The PRA also proposes to:

• change the Senior Manager Function (SMF) Requirements for UK captives by amending the Insurance – Senior Manager Functions Part of the PRA Rulebook;
• require each UK captive to include at least one non-executive director (NED) on its board;
• introduce an expectation that certain UK captives appoint an independent non-executive director (iNED), where warranted by their structure or complexity; and
• introduce additional UK captive specific expectations on the governance of:
  • Material third-party arrangements;
  • Whistleblowing; and
  • internal audit.

Proposal 1: SMF requirements for UK captives

7.5 The PRA proposes to introduce a Chief Executive function (SMF1) for UK captives (see Annex I of Appendix 1). At present UK captives would be subject to the current Solvency UK requirements that require at least three designated SMF roles (a Chair of the Governing Body function, Chief Executive function and the Chief Finance function). Under this proposal, only one SMF would be required for UK captives.

7.6 The PRA recognises that the role of a Chief Executive for a UK captive differs from that in other regulated firms, reflecting their specific and narrow business models. The PRA therefore proposes to set out tailored rules and expectations for the particular SMF1 responsibilities in UK captives. The PRA considers that requiring only a single SMF for these firms is proportionate to the limited nature and scale of the activities typically undertaken.

7.7 The SMF1 is the senior executive accountable for the overall management and conduct of the UK captive’s business, including the execution of board strategy, regulatory compliance, and oversight of outsourced activities. While UK captive structures and proportionality shape how these responsibilities are discharged, they do not dilute individual accountability. The SMF1 remains responsible for ensuring the captive is run in a safe, sound, and compliant manner and is subject to the Duty of Responsibility under the SMR, as outlined within the draft captive insurance SS at paragraph 6.30–6.32.

7.8 The PRA also proposes that generally only one individual would need to hold the SMF1 role for UK captives. However, in the case of certain, more complex UK captive structures, the PRA recognises that there may be a need to appoint more than one individual to hold the SMF1 role. Such appointments should only be made where justified and appropriate, and each individual will be deemed fully accountable for all responsibilities inherent in or allocated to, that function. It is also acknowledged that, provided there are no conflicts of interest, an SMF1 role could be held by a director of a third-party such as an outsourced service provider provided that individual meets the PRA’s fit and proper standards and applicable regulatory requirements.

7.9 In some cases, it may also be appropriate for firms to appoint an SMF3 (executive director). This may be the case in a complex structure, or where it may help with operational decision-making, board oversight, and general governance. The PRA also expects the UK captive to propose contingency plans should the individual(s) be unable to continue in the role.

7.10 The PRA proposes that UK captives should consider any potential conflicts of interest and how they shall be managed and addressed when appointing any SMFs.

Proposal 2: Boards, non-executive directors (NEDs), independent non-executive directors (iNEDs), and conflicts of interest

7.11 The PRA proposes a requirement that the board of a UK captive should include at a minimum one NED (see Annexes G and R of Appendix 1). The presence of a group-affiliated NED can support effective oversight by improving understanding of the group context. It can also highlight how group decisions and incentives may affect the UK captive’s prudential position and strengthen information flows and escalation.

7.12 To support independent challenge at the board level, the PRA also proposes to introduce an expectation that UK captives appoint an iNED on the board, where this is proportionate to the nature, scale, and risk profile of the firm. In addition, UK captives can also appoint an independent chair where this supports effective board oversight.

7.13 Though boards are responsible for overseeing a risk-management and internal control framework that is proportionate but effective, the PRA recognises that, even among single-parent captives, business models can vary significantly. The PRA therefore proposes that UK captives should regularly assess the nature, scale, and complexity of the risks that they run in determining the appropriate approach. The PRA proposes that this assessment should include and may not be limited to:

• Lines of business: for example, speciality lines, such as cyber insurance and long-tail liability lines including product liability, directors and officers, professional indemnity, and environmental risks, are generally more complex and carry higher risks. In contrast, UK captives writing predictable, short-tail risks would generally have a lower risk profile.
• Insurance of material non-group undertakings: UK captives that insure only their own group business would generally be considered lower risk from a policyholder protection perspective, because any losses arising from failure would be borne within the same corporate group. Insurance of material non-group undertakings introduces exposure to policyholders outside the group, even where the insured risks are well understood and effectively managed.
• Geographic scope: UK captives that provide multi-jurisdictional risk coverage are generally exposed to a broader range of risks and operational complexities.

7.14 In applying this assessment, UK captives should focus on what the regime is designed to achieve: a safe and sound captive that can meet its obligations, supported by governance and risk management that are appropriate to its business model. The factors above are therefore indicative and non-exhaustive, and UK captives should use judgement to identify which factors are most relevant to their risks and explain how they have reflected them.

7.15 This proposal also reflects PRA supervisory experience and international guidance that indicates that captive boards are often composed primarily of parent-group executives and may, in some cases, benefit from further insurance expertise.^{footnote [25]} While this does not necessarily imply an unsound business model, it may increase reliance on advisers. The presence of an iNED can help to mitigate such reliance by providing independent scrutiny and additional challenge to board discussions.

7.16 While single-parent captives may present lower risks to the PRA’s primary objectives due to the alignment of interests between the captive and its parent, this alignment can also give rise to specific conflicts of interest. Examples of such conflicts, expanded on in the draft captive insurance SS along with potential mitigants, are:

• owner vs insurer conflict;
• policyholder dominance;
• board dual-loyalty conflict;
• capital extraction vs resilience conflict; and
• underwriting integrity conflict.

7.17 These conflicts are the potential consequence of captives sitting within the same corporate group whose risks they insure, concentrating ownership, control, and policyholder interests. This can create tension between group commercial objectives and prudent insurance operations, requiring governance capable of delivering independent challenge and disciplined decision-making.

7.18 Boards must be able to demonstrate that these conflicts are identified, considered, and appropriately managed. They must also identify whether an iNED is necessary to support this, given their important role in:

• providing independent scrutiny of decisions where parent group and insurer interests may diverge; and
• supporting evidence that the board is capable of acting in the interests of the insurer as a regulated entity.

7.19 From a supervisory perspective, where appointed, an iNED is expected to:

• question the decisions of the UK captive and provide constructive challenge on underwriting, reserving, capital and risk appetite decisions;
• facilitate discussions on whether decisions are driven by insurance considerations rather than primarily commercial factors;
• ensure that corporate governance and compliance requirements are appropriately met; and
• support effective board deliberation and clear, sufficient documentation.

7.20 The above proposals give effect to the PRA’s expectations that boards have an appropriate balance of skills, experience, and independence of judgement to enable effective challenge.

7.21 The PRA does not propose to mandate iNEDs or prescribe board structures for all UK captives but instead seeks to reinforce board effectiveness in a manner that complements SMR accountability.

Proposal 3: Additional governance policies

Third-party arrangements

7.22 The PRA proposes to set clear expectations on the governance of third-party arrangements for UK captives. It recognises that these arrangements are fundamental to the captive business model and, if not effectively overseen, may undermine accountability, control, and the PRA’s objectives. The PRA is concerned with material third-party arrangements for UK captives, relating to the management and delivery of its core functions. The PRA gives examples of what it considers to be indicative of such functions in paragraph 6.68 in the draft captive insurance SS.

7.23 Consistent with the approach set out in the SMR governance proposals, the PRA proposes to clarify that for third-party arrangements, overall accountability must remain clearly allocated to the firm’s senior management. This includes the individual(s) performing SMF1, and any individual(s) performing SMF3, where appointed. Third-party arrangements do not diminish the responsibility of the board or senior management for regulatory compliance, risk management or prudential outcomes.

7.24 As set out in the draft captive insurance SS (see paragraph 6.72), the PRA emphasises that UK captive boards should exercise effective oversight and challenge over third-party arrangements. This includes appropriate contractual arrangements, proportionate management information, establishing escalation processes and retaining the ability to take corrective action where third-party arrangements are ineffective.

7.25 The PRA considers that effective governance of third-party arrangements is particularly important for UK captives where such arrangements may give rise to conflicted incentives. For example, where captive managers perform multiple roles or where commercial considerations may conflict with prudential outcomes. The proposed approach is therefore intended to ensure that accountability under the SMR is genuinely exercised in practice, rather than diluted through reliance on third-parties.

7.26 From a supervisory perspective, the PRA proposes to continue relying on robust firm‑level governance of third-party arrangements, with accountable Senior Managers and the board remaining responsible for all outcomes.

Whistleblowing

7.27 The PRA proposes that UK captives must establish, maintain, and implement appropriate whistleblowing arrangements. Captives sit within the same corporate group as their parent and this structure may create certain conflicts that have to be raised or escalated. It is important that there are effective arrangements for this, and that all wrongdoings, regulatory breaches, and risks are addressed.

7.28 The PRA’s intended whistleblowing arrangements are important to provide a route for concerns to be raised, supporting transparency, accountability, and the early detection of risks that may otherwise remain unresolved.

7.29 The PRA recognises that many captives have few, or no direct employees, but considers these mechanisms necessary for prudential soundness. UK captives should consider the nature of their scale and complexity when deciding how to set up arrangements that are proportionate.

7.30 As stated in the draft SS, where whistleblowing arrangements are delivered through group, outsourced, or third-party structures, firms should ensure these arrangements remain effective in practice and aligned with the rules set out in Appendix 1.

Internal audit

7.31 The PRA proposes that UK captives would be expected to have an internal audit function. The PRA considers that this function would provide independent assurance that can improve a UK captive’s risk management, governance, and internal control processes. Details of what the PRA considers to be an effective internal audit function can be found in paragraph 6.52 of the draft captive insurance SS.

7.32 The PRA recognises that a captive’s business model relies heavily on outsourcing and has thus allowed UK captives to outsource this function for the purposes of proportionality. That being said, accountability for this function remains with the UK captives’ board and senior management, particularly those individuals performing SMFs. UK captives that choose to outsource their internal audit function remain fully responsible and are subject to PRA governance expectations on material third-party arrangements.

8: Other areas of policy

8.1 To deliver a complete and robust prudential regime for UK captives, the PRA proposes to set rules and policy in some further areas as set out in this chapter. These proposals set out general principles for the operation of UK captives and generally reflect requirements that already apply to existing PRA-authorised firms. Where appropriate, the PRA has modified or limited the application of these general principles to reflect the low risks posed and simpler business model of captives relative to commercial insurers. Except where otherwise stated, the proposed rules relating to these areas of policy are set out in Annex P of Appendix 1.

Proposal 1: General Provisions

8.2 The PRA proposes that the existing General Provisions Part of the PRA Rulebook would apply to UK captives. This Part sets out baseline provisions that support the effective and orderly operation of the prudential framework across all PRA-authorised firms.

8.3 In particular, the PRA considers it appropriate that the emergencies provisions of the General Provisions Part would apply to UK captives. These provisions address circumstances where an emergency event prevents a firm from complying with its regulatory obligations and provide clarity on the treatment of rule breaches arising directly from such events. Applying these provisions ensures that UK captives benefit from, and are subject to, a consistent framework for addressing emergencies in a proportionate manner.

8.4 The PRA considers that specific disclosure provisions for UK captives are appropriate. In particular, the PRA proposes that when a UK captive engages with a material non-group undertaking, it should disclose that the insurance cover is provided by a UK captive (distinct from a commercial insurer). It should also disclose that it is owned by the parent undertaking and its affiliated companies where relevant.

8.5 The existing General Provisions Part of the PRA Rulebook includes requirements on firms relating to financial penalties issued by the PRA. As PRA-authorised firms are subject to PRA rules, the PRA considers it appropriate that neither a UK captive nor its directors or employees should be able to insure against, transfer or otherwise neutralise the effect of PRA financial penalties. These restrictions would be achieved via the proposed rules 7.1 and 7.2 on regulatory fines within Annex P of Appendix 1. The PRA therefore proposes that UK captives would not be in scope of the financial penalties provisions within the existing General Provisions Part.

Proposal 2: Fundamental Rules

8.6 Within the PRA Rulebook, the PRA’s Fundamental Rules collectively act as an expression of the PRA’s general objective of promoting the safety and soundness of regulated firms. The Fundamental Rules underpin the PRA’s wider rules and policy framework to provide a baseline set of requirements for all firms.

8.7 The PRA therefore considers it appropriate that Fundamental Rules 1 to 7 should apply to UK captives. The PRA considers that these rules provide a foundation for the effective authorisation and supervision of UK captives, advancing its primary objectives.

8.8 The PRA is not proposing to include UK captives in the scope of Fundamental Rule 8, which requires a firm to prepare for resolution so that it can be resolved in an orderly manner with minimum disruption to critical services. Given the low risk that captives pose to policyholder protection and wider financial stability, the PRA considers that application of Fundamental Rule 8 to UK captives would be disproportionate. The PRA’s proposed policies for UK captives in difficulty or run-off are set out further below.

Proposal 3: Information gathering

8.9 The existing Information Gathering Part of the PRA Rulebook applies to all PRA-authorised firms and proceeds from the PRA’s FSMA powers to require the provision of documents/information from firms.

8.10 The PRA proposes to set the same requirements on UK captives as per other firms as set out in Annex F of Appendix 1. The PRA considers that this would support the effective supervision of UK captives and help establish a credible UK captive regime.

Proposal 4: Use of skilled persons

8.11 The PRA maintains a range of supervisory tools and actions to support its ongoing supervision of the UK financial services market. One of these tools is a skilled persons report under section 166 of FSMA. The Use of Skilled Persons Part of the PRA Rulebook sets out requirements for firms that are subject to a skilled persons review. The existing SS7/14 – Reports by skilled persons sets out how the PRA exercises this FSMA power in its supervision of firms.

8.12 The PRA notes that this power under FSMA is available in its supervision of UK captives. The PRA therefore proposes to set similar requirements on UK captives as per other firms as set out in Annex R of Appendix 1, and to include UK captives within the scope of SS7/14.

8.13 The PRA has a range of supervisory tools available when engaging with UK captives. Consistent with the proportionate design of the regime, the PRA would expect to use supervisory dialogue, information requests and routine monitoring in the first instance to address concerns. The PRA considers that these tools will ordinarily be sufficient to clarify issues and support timely remedial action, given the nature, scale and complexity of UK captives.

8.14 The PRA’s power to commission a skilled persons review under section 166 of FSMA would nevertheless remain available in relation to UK captives. The PRA would expect to use this power only where other supervisory tools have not been effective, or where independent assurance is necessary to support the PRA’s statutory objectives.

Proposal 5: Auditors

8.15 The existing Auditors Part of the PRA Rulebook applies to all PRA-authorised firms and sets out requirements for firms to appoint auditors and cooperate with them, as well as requirements for the firm’s auditor.

8.16 Although captives typically have a narrow business model and limited scope of activities, they would remain authorised insurers with insurance liabilities. The PRA therefore considers the auditor’s role to be important in supporting confidence in a UK captive’s financial position and governance, particularly given the PRA’s proposals for the regulatory balance sheet to be based largely on audited statutory accounts.

8.17 The PRA therefore proposes to include UK captives in the scope of the Auditors Part of the PRA Rulebook. Applying this Part supports effective supervision and confidence in reported information and aligns UK captives with the baseline prudential framework applicable to other PRA-authorised firms.

Proposal 6: Risk management

8.18 The PRA considers that risk management requirements are necessary to advance its primary objective of promoting the safety and soundness of PRA-authorised firms. Risk management arrangements support firms in identifying, monitoring and managing material risks, and in maintaining adequate financial resilience. As outlined in Chapter 7: Governance, Boards are responsible for overseeing a risk-management and internal control framework that is proportionate but effective.

8.19 Although the risk profile of a captive differs from that of a commercial insurer, captives can still be exposed to material underwriting, reserving, investment, liquidity and operational risks. This includes where they write new or evolving exposures or rely on reinsurance and outsourced service providers. The PRA notes that captives may be more exposed to concentration risk than commercial insurers because their business will be concentrated on the parent undertaking, other group entities and material non-group undertakings.

8.20 An effective risk-management system supports timely identification and escalation of emerging issues and underpins a captive’s ability to meet claims as they fall due. It can also contribute to securing an appropriate degree of protection for those who are or may become insurance policyholders, where a captive may create exposures beyond the parent or sponsor (for example, through third-party beneficiaries or material non-group undertakings).

8.21 The PRA therefore proposes that UK captives would be required to maintain an effective risk-management system, comprising processes and reporting procedures necessary to identify, measure, monitor, manage and report, on an ongoing basis the risks to which it could be exposed. See proposed rule 2.4 in Annex R of Appendix 1.

8.22 The PRA proposes to supplement this baseline rule requirement with supervisory expectations that provide further detail on what the PRA expects firms to do in practice to operate an effective risk-management system. These expectations are intended to support consistent implementation, while remaining outcomes-focused and capable of being applied proportionately to the nature, scale and complexity of UK captives.

8.23 The PRA’s proposed expectations are set out in the accompanying draft captive insurance SS.

Proposal 7: Run-off and captives in difficulty

8.24 The proposed rules relating to these areas of policy are set out in Annex T of Appendix 1.

Run-off

8.25 Where a UK captive decides to cease writing new insurance business and enter run-off, the PRA proposes that the firm would be required to notify the PRA within 28 days of that decision.

8.26 The PRA proposes that, upon request, the UK captive must be ready to explain its run-off strategy to the PRA and how or to what extent all liabilities to policyholders will be met as they fall due. This would include providing the necessary financial projections to demonstrate how it will cover the run-off period until all liabilities to policyholders are met.

8.27 The PRA’s supervisory approach in run-off would depend on the circumstances of the firm and the nature of its business, including the scale and complexity of its liabilities, reliance on reinsurance or group support, and the risks to policyholders. The PRA would expect to monitor the firm’s progress through run-off, using routine supervisory tools. Its usual supervisory powers under FSMA would remain available where appropriate.

8.28 The PRA proposes that a UK captive in run-off must notify the PRA within 28 days of any material change in the circumstances of its run-off. This would include, for example, material changes to its run-off strategy, financial position, ability to meet liabilities to policyholders as they fall due, or reliance on reinsurance or group support.

8.29 The PRA’s proposed expectations and supervisory approach are set out in the accompanying draft captive insurance SS.

Captives in difficulty

8.30 The PRA proposes that a UK captive would be required to notify the PRA without delay where it breaches its financial requirements or if there is a known risk of non-compliance within the next three months. The PRA also proposes that captives would not be permitted to make distributions (eg dividend payments) if they would breach the CCR as a result.

8.31 Reflecting the main purpose of UK captives as group risk management vehicles, the PRA considers it appropriate to allow for a range of potential outcomes following a breach of financial requirements. The appropriate response will depend on the circumstances of the breach, including its cause, duration and the captive’s role within the wider group. This may include recapitalisation, orderly run-off, extinguishing the liabilities or other actions that restore compliance and address risks.

8.32 Following a breach, the PRA would record the firm’s proposed response and monitor the outcome. The PRA proposes that it would not approve a UK captive’s choice of response but instead would assess whether the actions taken appear sufficient to restore compliance and address risks to the PRA’s statutory objectives.

8.33 The PRA’s supervisory approach would depend on the circumstances and outcome following the breach, including the credibility and timeliness of remedial actions and the residual risks to policyholders and safety and soundness. The PRA’s usual supervisory toolkit, including its powers under FSMA, would remain available where appropriate.

8.34 The PRA considers that this approach supports proportionate supervision by allowing outcomes that are tailored to the specific UK captive business model, while ensuring that risks to the PRA’s statutory objectives are appropriately managed. The PRA’s proposed expectations and supervisory approach are set out in the accompanying draft captive insurance SS.

Proposal 8: Other policy on the scope of a UK captive’s activity

Prohibition on covering regulatory fines

8.35 The PRA proposes to restrict UK captives from providing insurance or indemnity against regulatory fines imposed on their parent undertaking, affiliated companies, material non-group undertakings or employees/directors/partners of these.

8.36 Regulatory fines are inherently uncertain, often resulting from lengthy or complex investigations, and can be considerable in size. Exposures of this kind could materially weaken a captive’s financial position and compromise its ability to remain resilient and meet its obligations to policyholders.

8.37 Commercial insurers do not generally offer cover for regulatory fines, which the PRA understands reflects the non-enforceability of claims arising from illegal or wrongful conduct. While this reduces the need for specific prudential restrictions in the commercial market, the close degree of control exercised by a parent over its captive creates different incentives. In particular, a captive may be unlikely, in practice, to resist or challenge such claims.

8.38 The PRA considers that allowing UK captives to insure regulatory fines would undermine their deterrent effect and facilitate moral hazard by reducing incentives for the insured persons to comply with the regulatory requirements of the sector in which they operate.

Restriction on transacting and investing in credit securitisations

8.39 As outlined generally in this CP, the PRA proposes that UK captives would operate within a tightly defined scope and be subject to proportionate prudential requirements. In this context, the PRA has considered whether UK captives should be able to transact and invest in credit securitisations in accordance with the Securitisations Part of the PRA Rulebook.

8.40 Given their likely scale and business model, the PRA considers that UK captives are unlikely to have the requisite expertise or resources to engage safely in securitisation activity. To maintain the intended simplicity and constrained risk profile of UK captives, the PRA therefore proposes to restrict UK captives from participating in credit securitisations or holding a credit securitisation position.

8.41 The PRA recognises that some UK captives may wish to invest in securitisation notes and such firms could apply for a rule waiver or modification, which the PRA would consider in the usual way. The PRA welcomes feedback on whether, in future, greater flexibility in respect of credit securitisations would be of interest to market participants.

9: Consequential amendments

9.1 This chapter sets out PRA proposals relating to minor consequential amendments required to amend the existing definitions in the PRA Rulebook and/or policy materials to ensure that these are clear and distinct from the proposed new captives regime.

Proposal 1: Consequential amendments to existing definitions

9.2 The PRA proposes to:

• amend the PRA Rulebook glossary terms ‘captive insurer’ and ‘captive reinsurer’ to rename these as ‘UK Solvency II intra-group insurer’ and ‘UK Solvency II intra-group reinsurer’; and^{footnote [26]}
• ensure that the existing several rule provisions relating to these insurers in the Solvency UK framework are updated accordingly.

9.3 The proposed PRA Rulebook amendments are set out in Appendix 2. These amendments are intended to avoid potential confusion between the Solvency UK terms and the new UK captive regime proposed in this CP.

10: Cost benefit analysis

10.1 The proposals in this CP would enable the development of a UK market for single-parent captives (hereafter ‘captives’), which is the focus of this cost benefit analysis (CBA). The PRA will prepare a new CBA if or when it brings forward proposals for other types of captive insurers, including captive cells in protected cell companies (PCCs). PCC captives are therefore not in scope of this CBA.

10.2 The baseline for the CBA is the current regulatory framework (Solvency UK), which places a disproportionate burden on captives relative to the risks they pose, and thereby discourage organisations from setting up new UK captives. There are currently no UK-headquartered captives with an authorisation to write new business in the UK.^{footnote [27]}

10.3 By making the way captives are regulated and supervised in the UK more proportionate and internationally competitive, the PRA expects its proposals would facilitate the development and growth of a UK captive insurance market for the first time (see sections entitled ‘Changes in domestic regulation’ and ‘International comparison’).

10.4 The PRA has analysed the impact of its own proposals for this CBA. Where applicable, it has also taken account of its dependence on the FCA’s captive insurance proposals, which are published separately, given that the PRA and FCA would jointly authorise and supervise UK captives in the proposed regime. In taking account of the FCA’s proposals for this CBA, the PRA notes at a high level that they would complement its own proposals and contribute towards a proportionate and internationally competitive regime.

10.5 The PRA does not generally consult its CBA Panel (the Panel) if it expects its policy proposals will have direct impacts on PRA firms below an annualised threshold of +/-£10 million. While the PRA does not expect the direct impacts of its proposals to exceed this threshold, it has voluntarily consulted its CBA Panel as the proposals would effectively create a new class of insurance firm in the UK and are thereby expected to change the shape and size of the UK insurance sector.

10.6 The CBA Panel considered the PRA’s analysis and provided valuable feedback, which is reflected in this CBA. The core suggestions made by the Panel and the PRA’s actions as a result are:

• Expected impact on existing UK insurers – the Panel advised that any loss of business for existing UK insurers would represent a transfer to UK captives, rather than a true economic cost. The PRA has reflected the Panel’s consideration in its analysis of the costs of its proposals to firms in paragraph 10.42.
• Extent of the costs – the Panel recommended that the PRA provide a more comprehensive cost assessment, including reflecting those costs incurred by the FCA, of introducing a UK captives regime, noting the costs would otherwise appear relatively low in comparison to the benefits. The PRA has reflected this recommendation in the CBA by adding further consideration of certain costs, including estimating the PRA’s expected project costs (paragraph 10.39) and by pointing towards the potential costs incurred by the FCA (paragraphs 10.38 and 10.39).
• Balance of costs and benefits – the Panel suggested that the costs and benefits should be presented in a way that facilitates easy comparison. The PRA has addressed this point by ensuring any quantified costs are presented on the same basis, with a total provided for the first five years of the regime (paragraph 10.32).
• Tax implications – the Panel recommended including a high-level acknowledgement in the CBA of the impact that tax may have as a factor influencing whether organisations establish captives in the UK. The PRA has included an acknowledgement of tax implications in paragraph 10.18.

Case for action

10.7 The UK insurance market is deep and internationally competitive, but some UK organisations still face difficulties in finding economically efficient pricing or securing coverage for certain underserved risks. This is partly because commercial insurers design and price insurance products to reflect loss experience across broader markets. This may differ from the actual risks faced by individual insureds and lead to coverage exclusions or economically inefficient pricing, particularly in times when insurance pricing is higher than usual (‘harder markets’). Commercial insurers may also find it challenging to underwrite new and emerging risks due to limited loss data. In such cases, the prospective policyholders may themselves have superior information and knowledge about their own risk exposures, which supports more efficient pricing.

10.8 In response to these challenges, some UK organisations have sought out captive solutions as a means of ‘self-insurance' and a way to broaden their coverage options and tailor risk-financing costs based on their individual risks.^{footnote [28]} However, in practice, organisations do not set up captives in the UK because the UK currently largely applies the same regulatory requirements to captives as it does to commercial insurers writing third-party business – despite captives having materially different business models and lower risk profiles.

10.9 The PRA considers its current regulatory framework imposes costs on prospective UK-domiciled captives that are disproportionate to the prudential risks they pose. As a result, organisations face higher barriers to setting up captive insurance programmes in the UK than in jurisdictions with more proportionate captive regimes. This also means the UK loses some high-value economic activity to other countries.

Impact of proposals

Changes in domestic regulation

10.10 The PRA considers that captives pose lower risks to its primary objectives than standard commercial insurers. This is because captives are generally owned and controlled by their main policyholders, with limited obligations to material non-group undertakings and minimal exposure to third parties. Given the substantially lower risks to its primary objectives, the PRA considers that its proposed regulatory and supervisory approach for single-parent captives is more proportionate to the risks they pose.

10.11 Under the baseline (ie the current rules), a UK-based captive would benefit from some simplifications in respect of their capital requirements but would otherwise be subject to the same PRA rules as a standard commercial insurer.^{footnote [29]} Prospective captives would also be subject to the same processes for authorisation and supervision as a standard commercial insurer, albeit commensurate to their size in terms of premium income or liabilities.

10.12 The PRA’s proposals ensure the proposed approach to the regulation and supervision of UK captives is more proportionate – significantly simpler and more flexible than it is under the baseline. For instance, a UK captive would benefit from a more streamlined approach to authorisation and supervision, a lower reporting burden, less complex and generally lower capital requirements, greater flexibility to use contingent capital instruments as regulatory capital, and a simpler approach to insurance liabilities, including no requirement for a risk margin. The PRA therefore considers that – supported by its engagement with industry stakeholders – its proposals would reduce the costs for organisations to carry on captive insurance in the UK and facilitate the growth of a captive market in the UK.

10.13 Table 6 summarises how key aspects of the PRA’s proposals for a bespoke UK captive framework would differ from the regulatory baseline and comments on why these differences could support new UK captives without compromising the PRA’s primary objectives.^{footnote [30]}

International comparison

10.14 The PRA expects that demand for new UK captive formations would also be influenced by the international competitiveness of the PRA’s proposed regime. Many large organisations would have a choice between establishing a captive in the UK or overseas, while others may consider redomiciling existing captives to the UK from foreign jurisdictions.

10.15 The PRA has assessed the international competitiveness of its proposed UK captive framework against international norms by making comparisons between the key components of a captive regime. The PRA notes that successful domiciles tend to be characterised by proportionate regulation, and flexible and adaptable approaches to authorisation and supervision. The PRA’s analysis considered a number of key metrics, including on capital and solvency, regulatory responsiveness, and the expected costs and flexibility associated with operating in a particular captive jurisdiction.

10.16 The PRA’s analysis indicated that, under the PRA’s proposed design, the regulatory regime in the UK would compare favourably to those in the more established domiciles. The PRA considers the UK may be particularly competitive with respect to:

• regulatory certainty;
• supervisory credibility;
• proximity to established insurance markets and other financial services infrastructure; and
• proximity to parent groups, in the case of UK organisations.

10.17 Table 7 summarises the findings of the PRA’s analysis. The PRA’s proposals would broadly align UK captive standards with international norms.

10.18 Further to the above, the PRA recognises take-up for a UK captive regime would be influenced by considerations around the way tax frameworks operate in different jurisdictions. However, this is outside the PRA’s remit. The PRA also notes that its proposals would include a more restricted scope for UK captive insurance activities initially. As noted above, the PRA would consider policy proposals for other types of UK captives, such as PCC captives, when legislation allows.

Illustrative scenarios

10.19 The sections below consider the costs and benefits associated with the PRA’s proposals. In these sections, the PRA has assessed how the costs and benefits may vary according to different scenarios. Specifically, the PRA recognises there are likely to be different economic, financial and prudential outcomes if an organisation sets up a UK captive to insure risks that would otherwise be:

• uninsured by the organisation;
• covered by external insurance arrangements with a Solvency UK firm; or
• covered by existing captive arrangements with an insurer outside of the UK.

Benefits

Insurance market outcomes

10.20 The PRA considers that a key benefit of its proposals is to broaden the range of risk financing opportunities that are viable for organisations in UK-regulated insurance markets.

10.21 Where an organisation establishes a UK captive to retain and manage risks that were otherwise uninsured or covered by external insurance with a Solvency UK firm, the PRA considers that the organisation may be able to benefit from:

• More efficient risk financing, including improved pricing discipline and greater cost stability. Captives may help organisations to identify and price risks more appropriately based on their own risk profile, instead of relying on market-standard products available from traditional commercial insurers. Captives may also help mitigate leaving the organisation exposed to uninsured losses due to either lack of available or affordable insurance. For organisations replacing existing insurance arrangements with UK firms, the PRA expects this benefit would be particularly relevant in harder markets and during periods of dislocation in the insurance pricing cycle. This could help to support more resilient risk financing outcomes when commercial capacity tightens.
• Insurance for new and emerging risks. Captives may allow organisations to design coverage terms and structures that are more closely aligned with their specific operational risks and governance arrangements. This may result in insurance solutions that are more effective than other forms of ‘self-insurance’ (for example, organisations self-financing losses that could otherwise have been insured) and may better reflect their needs than standardised market offerings or self-insurance.
• Aligning incentives. The PRA considers that, under the proposals in this CP, UK captives would generally have clear incentives to provide high-quality risk coverage for their policyholders, as their policyholders will also be their owners and controllers. This may promote safety and soundness in UK insurance markets by encouraging stronger risk management practices and reducing the economic inefficiencies associated with adverse selection and moral hazard.
• Access to reinsurance. Captives may give organisations greater control to decide on the extent of the risk they want to retain on their balance sheet, and offload to an external reinsurance or fronting partner.
• Lower frictional costs. For organisations replacing external insurance arrangements, access to captive insurance may further reduce costs by enabling them to avoid the commission fees that may otherwise be included in premium payments to third-party insurers, potentially benefiting the wider economy.

10.22 More broadly, the PRA considers that its proposals could improve the functioning of UK-regulated insurance markets by:

• Fostering innovation. The proposals could facilitate innovation in insurance markets by giving organisations a way of covering new and emerging risks that may not yet be commercially viable with standard commercial insurers, even where reinsured.
• Facilitating effective competition. The availability of captive insurance – which typically has better terms and conditions than commercial insurance, including lower premia – could strengthen an organisation’s bargaining position with traditional insurers when purchasing excess of loss insurance and may otherwise put downward pressure on pricing in affected markets.

10.23 The benefits listed above may be less significant with respect to organisations that have captives in other jurisdictions, as these organisations can already leverage their overseas captives as an alternative to external commercial insurance or no insurance (ie being uninsured). However, the PRA’s proposals would still broaden options for these organisations. For example, these organisations may be able to benefit from efficiency savings, as the PRA’s proposals would support them to establish captives closer to their UK operations and, where relevant, parent companies. Further, organisations redomiciling captives to the UK may benefit from a closer proximity to reinsurers and fronting partners based in the UK – as well as other established financial and legal services – which may reduce their overall cost of business.

Economic growth

10.24 The PRA expects its proposals would also generate economic growth in the UK by creating the conditions for the development of a captive insurance market. The extent to which the PRA’s proposals contribute to economic growth would depend on the number of captives established in the UK, and the amount of economic contribution each UK captive generates.

10.25 The estimates presented below are indicative and conservative, reflecting uncertainty around take-up in a newly established UK regime. They may not capture all impacts, particularly where benefits accrue through risk-financing efficiency, resilience, or all elements of a captive owner’s investment decisions.

Estimated economic contribution

10.26 The PRA notes that its UK captive proposals may support economic growth through the following main channels:

• Direct contribution to UK jobs and revenues. The PRA expects that the growth of a UK captive insurance industry would generate economic activity via new jobs and revenues in ancillary service industries like captive management, legal advisory, external audit, and actuarial services (to the extent required by firms).
• New business with regulated UK firms. Existing firms may benefit from the PRA’s proposals because organisations with onshore captives may want to offload some of their insured risks to UK reinsurers. Meanwhile, other organisations may want to purchase new policies from UK insurers with a view to reinsuring some or all of the underlying risks using their captives (a fronting arrangement). This supports demand for UK-based insurance and reinsurance and represents new business if this activity does not arise from displaced existing arrangements in the UK.
• Better economic outcomes for captive owners. More efficient risk-financing strategies, including the coverage of new, emerging, or complex risks, could improve retained earnings and cashflow stability for captive owners (where they are not already using non-UK captives to insure the same risks). This may result in further benefits to the UK economy, assuming parent companies operating in the UK may have more investible profit as a direct result of their captive strategies.^{footnote [31]}
• Investment in the UK. UK captives are likely to retain some premium income and capital domestically. The PRA therefore expects that UK captives may place a portion of their assets with UK institutions, including through deposits in UK deposit-takers or investments in UK assets.

10.27 Published reports on experiences in other jurisdictions suggest that each captive generally contributes between £100,000 and £300,000 per year to GDP within their jurisdictions.^{footnote [32]} In these reports, the stated contributions to GDP generally include direct economic effects such as gross firm revenues and employment in ancillary service industries. The reports also generally include indirect economic effects relating to the purchase of goods and services, and economic effects relating to visitor and household expenditure services, that may arise because of captive activities. They do not include all tax impacts in every case.

10.28 The PRA has made more conservative assumptions about the likely economic contribution of each new UK captive, given the UK already has a well-established financial services industry supporting overseas captives. For instance, the PRA would expect a lower economic contribution from captives that are relocated to the UK from another jurisdiction as the overseas captive may have already been using services provided by UK companies. The PRA would also expect a negligible amount of visitor spending compared with other jurisdictions, particularly offshore jurisdictions, as the UK captive’s owners and its representatives are more likely to be based domestically with no need to travel to undertake captive business.

10.29 The PRA conservatively estimates that each UK captive could, on average, contribute between £50,000 and £150,000 to UK GDP per year.^{footnote [33]} However, economic contributions would vary according to the size and operations of the captive. This may be towards the lower end of the range for relocating captives, given the likelihood that some of the direct and indirect economic effects of the existing captive activity may already be captured in the gross revenues of UK service companies.

Estimated market size

10.30 The PRA expects there may be a roughly even split between captive relocations and new captive formations. This is partly based on feedback received directly by the PRA from industry participants, feedback received through HMT’s consultation, and the results of a recent Airmic survey.

10.31 With respect to the potential rate of growth of a UK captive market, evidence suggests that leading domiciles welcome between 5 and 40 new UK captive formations each year.^{footnote [34]} The PRA conservatively estimates that UK captive formations would be towards the lower end of this range under its proposals, possibly up to about 20 per year. This would be more consistent with the experience of recently established captive domiciles like France, which have authorised around 10 new captives per year in their initial years.

Example scenarios

10.32 Based on the indicative conservative estimates set out above, the PRA notes the following potential scenarios for cumulative economic growth:

• Low growth scenario: Approval of 25 UK captives over five years, at a rate of five UK captives per year, could deliver a total of £7.35 million in GDP contributions for the first five years. Assumes a 13:12 split between relocations and new captives, with each relocation contributing £50,000 per year, and each new UK captive contributing £150,000 per year. The indicative contributions are based on the range of assumptions outlined above.
• High growth scenario: Similarly, approval of 100 UK captives over five years, at a rate of 20 UK captives per year, could deliver a total of £30 million in GDP contributions for the first five years. Assumes a 50:50 split between relocations and new UK captives, with each relocation contributing £50,000 per year, and each new UK captive contributing £150,000 per year.

10.33 To avoid overcomplicating its scenarios, the PRA has not specifically controlled for the effects of inflation over time. It has also assumed a linear pattern of growth in the captive market over the first five years of the regime. The estimates are informed by international experience, but initial demand and impacts are uncertain given the regime is new and other jurisdictions offer more established and broader frameworks.

Costs

Economic costs

10.34 The PRA considers that its proposed regime is appropriately prudent for the risks posed by captives. However, it is possible that simplifying the regulatory standards for UK captives could in some cases increase the likelihood of potential failures or difficulties compared with what would be expected under the PRA's current Solvency UK framework.^{footnote [35]}

10.35 The PRA's proposals could therefore result in economic and financial costs if the proposed UK captive regime proved insufficient to prevent or mitigate the risks of a failure, and the UK captive owner would otherwise have been protected by an external insurance arrangement with a Solvency UK firm. These costs would include:

• Direct costs to policyholders. The failure of a captive would impose costs on its policyholders, mainly through unpaid claims. A single-parent captive’s policyholders would include its owners, who would be expected to the bear the costs of its failure, assuming they remain solvent at the time. However, they could also include fronting insurers, reinsurers, material non-group undertakings (up to 10% of business volume), and third-party beneficiaries of the captive’s insurance contracts.
• Indirect economic costs. The owners of a single-parent captive would be exposed to losses if their captive had insufficient resources to meet policyholder claims. This could result in indirect economic costs if, because of the losses, the captive owners were less able to invest in its business or meet short-term obligations to partners and creditors.

10.36 The PRA has not attempted to quantify the possible costs to policyholders or the economy, given the difficulty in accurately predicting the likelihood of UK captive failures under the proposed regime. In theory, the costs could be significant if the parent were large and economically significant, including within its specific sector, as any resulting stress could spill over into the organisation’s supply chain or broader operating environment.

10.37 However, the PRA notes there are factors limiting the likelihood and scale of costs to policyholders and economy:

• Low probability of failure: While the proposals in this CP would generally lower prudential requirements for captives, the PRA notes that recorded captive failures have been rare under regimes with comparable features to the PRA’s proposals. Internal analysis of prominent captive jurisdictions found public evidence of two single-parent captive failures between 2003 and 2026. In both cases, the captives failed because their parent companies collapsed rather than because of poor underwriting practices or under-reserving encouraged by regulatory standards.^{footnote [36]} The PRA notes that parent companies would generally have strong incentives to ensure their captives are prudently managed and adequately capitalised – given the captives are established to support their parent companies – which may help to explain the low rate of captive failures.
• Safeguards limiting spillover effects: Under the PRA’s proposals, UK captives would be restricted to writing insurance business for their parent companies plus a limited scope of material non-group undertakings and, where relevant, transact with fronters and reinsurers. They would also be prevented from directly underwriting insurance for compulsory lines and employee benefits.^{footnote [37]} The PRA therefore expects that the effects of a UK captive failure would mostly be concentrated among a relatively narrow base of commercial policyholders, limiting possible spillover effects. Principally, the costs would be private costs borne directly by the UK captive’s owners and controllers.

Direct costs to the PRA

10.38 The PRA's proposals would result in direct ongoing costs to the PRA, given it would be responsible for authorising and supervising new UK captives alongside the FCA. The PRA expects it may require resources equivalent to about £450,000 to £750,000 over the first five years (£90,000 to £150,000 annually) to implement its proposed approach to authorisation and its target supervisory operating model, though resourcing would depend on the level of take-up by firms. Those staff would be responsible for managing and reviewing new UK captive applications, as well as carrying out ongoing supervision of UK captives and analysing their financial metrics after authorisation. The PRA notes that the FCA has assumed a similar level of costs (£135,000 to £143,000 annually) in CP26/29 with respect to its role in supervising and authorising UK captives.

10.39 In addition to ongoing staffing costs, the PRA would incur direct costs on a one-off basis to implement new technological and administrative processes for handling information about UK captives and collecting regular reporting from them. This would include some systems-related costs that would be shared with the FCA. Similar-sized projects have generally cost up to £500,000 to implement.

10.40 In view of the above, the cost to the PRA of introducing the UK captives regime could total about £950,000 to £1.25 million over the first five years, potentially with similar costs borne by the FCA – though the true costs would depend on the level of demand for the regime from new firms, as previously noted.

Direct costs to firms

10.41 New UK captives would incur direct costs to comply with the regulations proposed in this CP. However, the PRA has not considered these costs in isolation as part of its CBA on the basis that any organisation establishing a captive in the UK, or relocating one to the UK, is likely to have judged that their private benefits of doing so outweighed the expected compliance and other costs. These costs are therefore recognised as part of the PRA’s analysis above of the potential numbers of new captives applying for authorisation in the UK.

10.42 The PRA considered whether its proposals could result in direct costs to existing insurers if the simpler and more proportionate prudential standards set out in this CP incentivised organisations to write insurance policies through UK captives rather than purchasing it externally from commercial insurers in the UK. However, to the extent existing UK insurers lose business because of the PRA’s proposals, the PRA considers that the overall economic effect is likely to be broadly neutral because the business would be directly replaced by UK captive insurance flows. Similarly, commission fees that would otherwise have been payable to third parties and brokers would be retained by the UK captive policyholders, meaning there would not be any true costs to the overall economy.

Overall assessment

10.43 By increasing the viability of UK captive solutions, the PRA expects its proposals could support organisations to benefit from new risk-financing options in UK-regulated markets. In particular, the PRA notes that UK captives may help organisations to manage their risks more effectively than they could without insurance, or even in some cases through the commercial insurance market. This may support the resilience of the UK economy, promote safety and soundness of new UK captive firms in line with the PRA’s primary objectives, and support growth, to the extent it reduces costs for organisations and increases the amount of investible profit in the UK in line with the PRA’s SCGO.

10.44 Captives often outsource management functions to specialist third parties and may require additional support from actuaries or accountants in the preparation of statutory and regulatory accounts. The PRA therefore considers its proposals would further support economic growth, in line with the PRA’s secondary objectives, through increased economic activities in ancillary industries. This is to the extent these activities are not already present in the UK economy from the provision of services to overseas captives.

10.45 The key costs of the proposals include costs incurred by the PRA to authorise and supervise new UK captives and process information related to their businesses. The proposals would also generate costs if the PRA’s streamlined regulation of UK captives were insufficient to mitigate risks that could in extreme cases contribute to the failure of the parent organisation, particularly where a parent has systemic importance to the UK economy. However, this is only relevant if the parent would otherwise have been protected by existing insurance arrangements. The PRA also notes that recorded captive failures are rare and that spillover effects are likely to be lower in the event of failure given the PRA’s proposed limits on non-group business undertaken by UK captives.

10.46 Considering the above, the PRA considers that the benefits of its proposals could be significant, particularly through improved risk management and increased economic activity. In contrast, the associated costs are expected to be limited as permitted captive business models are likely to pose relatively low risks and the PRA intends to allocate resources proportionately to implement the regime. The PRA therefore considers that, overall, the benefits of the proposals are likely to outweigh the costs.

Figure 3: Summary of costs and benefits

11: PRA objectives analysis

Introduction

11.1 This chapter assesses how the PRA’s proposed UK captive regime advances the PRA’s primary and secondary objectives, based on the overall design of the regime as set out in this CP.

11.2 The proposed UK captive regime reflects the relatively low risks posed by captives, which primarily insure risks arising from their group’s own operations and commercial activities. The PRA has defined the scope of permitted activities (Chapter 3), centred on single-parent models and group risks, with limited provisions for closely connected non-group exposures. Within this scope, the regime limits the types of business that may be written, applies safeguards where activities may affect individuals, restricts non-group exposures and excludes activities that could give rise to more complex or higher prudential risks.

11.3 The PRA has calibrated the framework accordingly (Chapters 5 to 8). If the PRA changes the regime’s scope of permitted activities, it would revisit the calibration to ensure it remains aligned with the risks undertaken by UK captives.

11.4 The analysis below describes how the proposals advance the PRA’s objectives.

Primary objectives analysis

11.5 The PRA’s primary objectives are to promote the safety and soundness of PRA-authorised firms and to contribute to the securing of an appropriate degree of protection for policyholders.

Safety and soundness

11.6 The PRA considers that these proposals will advance this objective by addressing the specific risks presented by captive insurers, while ensuring UK captives maintain appropriate financial and operational resilience.

11.7 Captives, by fact of what they do, pose lower prudential risks than commercial insurers. The PRA has sought to further mitigate risks to safety and soundness through a combination of scope restrictions and proportionate prudential requirements in the proposed framework, including:

• restrictions on permitted business (Chapter 3), which constrain the overall risk profile of firms; and
• targeted requirements relating to financial resources and governance.

11.8 The PRA considers that a simplified regulatory balance sheet principally based on audited statutory accounts will provide a credible view of a UK captive’s financial position and obligations, supporting safety and soundness, proportionate to the risks presented.

11.9 The PRA’s proposal includes recognition of letters of credit and parental support arrangements, which are usually off-balance sheet items on a statutory balance sheet. To mitigate the risk of this leading to inconsistencies between the statutory and regulatory balance sheets (eg being insolvent on one basis but not on the other), the PRA proposes to require explicitly that UK captives maintain adequate financial and liquidity resources to meet their liabilities (see Annex Q in Appendix 1 of this CP).

11.10 The proposed restrictions on the risks that UK captives may accept are designed to keep their risk profiles low. This allows the PRA to apply capital requirements that are lower, proportionate to the reduced level of risk, supporting the PRA’s primary objectives.

11.11 The PRA considers that a simple, factor-and-floor calibration provides a minimum level of resilience, helping captives absorb losses and meet claims.

11.12 The proposed capital resources framework sets a baseline for risk management for UK captives by:

• ensuring the baseline capital requirement is backed by high-quality assets, demonstrating parental commitment and providing loss absorbency;
• allowing contingent capital subject to safeguards to support the availability of that contingent capital when it is needed.
• promoting prudent capital management through additional rules and expectations.

11.13 The PRA proposes to set proportionate governance requirements for UK captives to support safety and soundness. Clear responsibilities and appropriate oversight will help manage potential conflicts of interest in a way that reflects the lower complexity of captives. Under the SMR, this would be achieved through a minimum requirement of one SMF, rather than the multiple SMF’s typically required for Solvency UK insurers.

Policyholder protection

11.14 The PRA considers that the proposals are compatible with its policyholder protection objective. The safety and soundness analysis outlined in 11.8 to 11.13 above for requirements relating to financial resources and governance is also applicable to policyholder protection of organisations’ own risks insured by UK captives. Additionally, the PRA’s proposals advance this objective by limiting the exposure of external policyholders and applying safeguards where such exposure arises.

11.15 As noted in 11.2 above, captives are primarily designed to insure the risks of their parent company, though may insure some third-party exposures. Risks to third-parties are minimised through restrictions on lines of business with higher policyholder protection risk. For example, compulsory insurance lines, employee benefits and insurance for individuals (such as certain directors and officers policies), can only be underwritten on a reinsurance basis, so that a primary insurer subject to the standard insurance regime in the UK remains directly responsible to policyholders and other beneficiaries.

11.16 The PRA has also considered the implications of the proposed regime for the FSCS. In the limited circumstances where UK captives may insure non-group undertakings, the PRA proposes restrictions prohibiting insurance of FSCS-protected policyholders (generally individuals and small businesses). The proposals are designed such that UK captives would not generally create FSCS-protected claims, albeit it cannot be ruled out entirely given the underlying legal framework.

11.17 The PRA considers that these measures appropriately balance the ability of UK captives to insure their owners’ risks while providing an appropriate degree of policyholder protection.

Secondary objectives analysis

11.18 The PRA has assessed whether the proposals in this CP advance its secondary competition objective and its secondary objective to facilitate the international competitiveness of the UK economy (including in particular, the financial services sector through the contribution of PRA-authorised persons) and its growth in the medium to long term.

11.19 The PRA considers that the proposals advance its secondary competition objective by reducing regulatory barriers that are not justified by risk. By introducing a tailored regime that is calibrated to the defined scope and risk profile of UK captives, the PRA reduces unnecessary complexity and cost relative to applying the Solvency UK framework. This enables a wider range of organisations to consider establishing UK captive structures as part of their risk management strategy.

11.20 As outlined in the CBA (Chapter 10), the regime could also support competition by strengthening organisations’ bargaining position with traditional insurers.

11.21 The PRA considers that the proposals represent an important first stage in establishing an attractive UK regulatory framework for a range of UK captive structure. The new framework will broaden the range of risk-financing options available to organisations and contributing to the UK’s competitiveness as a centre for insurance activity with further expansion of the framework to follow.

11.22 In advancing its secondary objectives, the PRA has considered the operational features of the regime. The proposed framework includes a streamlined authorisation process, simplified reporting requirements and proportionate supervisory expectations.

11.23 The proposed capital framework, including factor-based requirements, is similarly designed to be proportionate to the defined scope of UK captives. This helps to avoid undue complexity, while supporting flexibility in capital and liquidity management, including the use of contingent capital arrangements, in line with international practices.

11.24 The PRA has adopted an outcomes-focused approach, as outlined in its proposed SS for UK captives (Appendix 3). This approach is intended to minimise unnecessary regulatory burden, support effective supervision, and facilitate the entry and operation of UK captives.

11.25 The PRA considers that, together, these features would make it simpler and faster for domestic and international organisations to establish UK captives compared to the current Solvency UK framework. This is expected to support economic growth by lowering barriers to entry, increasing insurance activity, and boosting demand for related professional services.

12: Other legal requirements

‘Have regards’ analysis

12.1 In developing these proposals, the PRA has had regard to the FSMA regulatory principles, and the aspects of the Government’s economic policy as set out in the HMT recommendation letter from November 2024. The following factors, to which the PRA is required to have regard, were of significance in the PRA’s analysis of the proposal:

12.2 The principle that a burden or restriction which is imposed on a person should be proportionate to the benefits which are expected to result from the imposition of that burden (FSMA regulatory principles): In preparing these proposals, the PRA has considered proportionality throughout. The PRA considers that captive insurance presents low risks to the PRA’s primary objectives, due to captives primarily insuring risks arising from their group’s own operations and commercial activities. The proposals include proportionate requirements for capital, governance, reporting, authorisations and other policies. This is also reflected in the targeted safeguards applied to areas such third-party exposures.

12.3 In particular, the proposals will allow flexibility in how expectations are met, provided the outcomes achieved are effective. This supports efficient authorisation, proportionate supervision and regulatory confidence without imposing costs that outweigh prudential benefit.

12.4 The principle that the PRA should use its resources in the most efficient and economic way (FSMA regulatory principles): The PRA considers its policy proposals, including the authorisation and ongoing supervision of UK captives, are proportionate and resource-efficient. Clear expectations on board responsibilities and individual accountability under the SMR are intended to facilitate supervisory assessment, engagement and intervention where necessary, particularly in firms with highly outsourced operating models and concentrated group influence. This enhances evidential clarity and accountability while remaining proportionate to the low risk profile of captives.

12.5 The principle that the PRA exercises its functions in a way that recognises differences in the nature of, and objectives of, businesses carried on by different persons (including different kinds of person such as mutual societies and other kinds of business organisation) (FSMA regulatory principles): The PRA recognises that captive insurance is distinct from commercial insurance. As such, the PRA's proposals have been designed to recognise these differences, outlining a new proportionate regime for UK captives. In addition, the PRA recognises different business models of captive owners and is exploring future policy development for group & association captives and protected cell company captives, as discussed in Chapter 13.

12.6 The principle that the PRA should recognise the vital contribution of the financial services sector to overall economic growth (The HMT recommendations letter to PRC November 2024), and the principle that the PRA should maintain and enhance the UK’s position as a world-leading global finance hub (The HMT recommendations letter to PRC November 2024): The PRA considers that a tailored UK captives regime has the potential of strengthening the UK insurance market offering and boosting its international competitiveness, which could lead to economic growth in the UK.

12.7 The principle that the PRA should aim to create a regulatory environment which facilitates growth through supporting competition and innovation (The HMT recommendations letter to PRC November 2024): The PRA considers that creating a UK captive regime can support competition and innovation, as captives specialise in risk management and often suggest claims-based insights to their parents for optimising operational efficiencies; captives often step in where coverage for certain risks is unavailable or expensive, thus addressing market gaps and boosting competition in the insurance industry.

12.8 The PRA has sought to ensure that governance expectations for UK captives are proportionate to their nature, scale and complexity. The approach avoids prescribing uniform or unduly burdensome governance structures, which could disproportionately affect low-risk, limited-purpose firms. By focusing on governance outcomes rather than form, the proposals support entry and ongoing operation of UK captives, facilitating effective competition in markets for insurance and risk-financing solutions, consistent with safety and soundness. The approach also provides regulatory clarity without imposing unnecessary requirements that could discourage firms from establishing or maintaining UK captives.

12.9 The principle that the PRA should exercise its functions as transparently as possible (FSMA regulatory principles, the Legislative and Regulatory Reform Act of 2006 and the Regulators’ Code 2014) and the principle that the PRA should ensure clear information, guidance and advice is available (the Regulators’ Code 2014): The PRA’s proposals outline tailored proportionate provisions for UK captives, with accompanying guidance and expectations in the proposed SS.

12.10 The principle that the PRA should provide simple and straightforward ways to engage with those they regulate and hear their views (Legislative and Regulatory Reform Act of 2006 and the Regulators’ Code 2014): In constructing these proposals, the PRA has convened six subject expert groups (SEG) meetings on designing the UK captives regime. The PRA has considered the feedback provided by the SEG meetings during the production of this CP and welcomes any feedback in response to this CP.

12.11 Responsibility of firms’ senior management subject to requirements imposed by FSMA (FSMA regulatory principles): The PRA recognises the importance of robust governance and risk management processes to the success of the new UK captives regime. The PRA has formulated simplified proportionate proposals on governance and the senior managers regime, for example requiring only one senior management function.

12.12 The PRA has had regard to other factors as required. Where analysis has not been provided against a ‘have regard’ for these proposals, it is because the PRA considers that ‘have regard’ to not be a significant factor for these proposals.

Statutory duty to consult

12.13 The PRA has a statutory duty to consult when introducing new rules/changing rules(FSMA s138J), or new standards instruments (FSMA s138S). When not making rules, the PRA has a public law duty to consult widely where it would be fair to do so.

Impact on mutuals

12.14 FSMA requires that the PRA assesses whether, in its opinion, the impact of the proposed rules on mutuals will be significantly different from the impact on other firms, and if so, details of the difference. The PRA considers that the proposals are unlikely to directly impact mutuals (as defined in s138k(5)), since group and association captives (which are similar to mutual insurers), are not included in the scope of the regime. See Chapter 13 of this CP.

Equality and diversity

12.15 In making its rules and carrying out its policies, services, and functions, the PRA is required by the Equality Act 2010 to have due regard to the need to eliminate discrimination, to promote equality of opportunity, and to foster good relations between persons who share a protected characteristic and those who do not. In line with its responsibilities under the Equality Act, the PRA has performed an assessment and considered the equality implications in formulating its proposals. The PRA will continue to consider the equality and diversity implications of the proposals during the consultation period and in relation to further consultations concerning future proposals.

13: Looking ahead: potential development

Overview

13.1 The preceding chapters set out proposals for establishing a tailored UK regime for single-parent captives, and the PRA welcomes responses on those proposals as set out in Chapter 2.

13.2 As referenced earlier in this CP, the PRA will consult on a PCC framework once the required legislation is in place. In addition, the PRA is considering other structures for future consultation and welcomes views on them. If, as part of this second stage, the PRA changes the regime’s permitted activities relative to what is proposed in this consultation and the subsequent policy statement, it would also reconsider the calibration of the framework for the new structures, to ensure it reflects the new risks being taken.

13.3 The first section in this chapter discusses group and association captives, and the second section discusses PCC captives. The PRA welcomes stakeholder views on these areas in line with the timings set out in Chapter 2. The PRA also welcomes views on the overarching direction of the regime development:

Q1. Aside from group & association and PCC captives, are there any other structures that could increase take-up of the regime while maintaining low prudential risks?

13.4 The PRA also notes that it held a SEG with industry participants on PCC captives last year and will consider their feedback during policy development on PCCs.

Group and association captives

What are group and association captives?

13.5 Group and association captives are insurance undertakings owned and controlled by multiple policyholders, rather than a single corporate group.

• Group captives are insurance undertakings owned and controlled by multiple firms that participate as policyholders, with ownership, governance, and economic outcomes shared among members. Participating firms may operate within the same sector or across different sectors, and risks may be homogeneous or heterogeneous, subject to agreed underwriting, loss-sharing, and capital arrangements.
• Association captives are commonly established by trade associations or professional bodies to insure the risks of their members. Participation and eligibility are typically linked to membership of the sponsoring association, with governance, risk sharing, and economic outcomes structured in accordance with the association’s rules and the captive’s constitutional arrangements.

13.6 In jurisdictions where they are permitted, group and association captives are used for a range of purposes. This includes:

• providing insurance capacity for risks that are difficult or costly to place in commercial markets;
• supporting access to insurance for smaller firms that may lack scale or bargaining power individually;
• pooling risks within a defined sector or profession where risks are perceived to be sufficiently similar; and
• promoting risk management and loss prevention among members through collective incentives.

13.7 These captives operate across a variety of sectors, including construction, healthcare, transport, and professional services. International experience suggests that such structures can be viable where there are sufficient understanding and management of shared or diversified risk exposures, robust governance, and clear mechanisms for loss sharing and capital replenishment.

Areas for discussion

13.8 From a prudential perspective, group and association captives differ from single-parent captives in a number of respects, including pooled ownership, shared loss experience, and reliance on collective governance and capital replenishment arrangements. These features may give rise to different risk profiles, including potential misalignment of incentives between members, complexity in decision-making, and challenges in managing stress events or orderly exit.

13.9 Should group and association captives be included in the UK captive regime in future, a number of broader policy and prudential considerations would arise. The PRA is seeking views on these issues to inform potential future policymaking.

13.10 Uses and demand: international experience suggests that group and association captives have been used as part of the wider insurance market to support access to risk-financing arrangements for firms that may otherwise lack the scale or incentive to establish captives on a stand-alone basis. Such structures are often used where commercial insurance capacity is constrained, pricing is volatile, or where collective approaches to risk management and loss prevention are considered beneficial.

13.11 The PRA would like to understand the extent to which such structures would be relevant in a UK context.

Q2. In what circumstances might group or association captives be useful in the UK market, and for which types of firms or sectors?

Q3. What objectives would firms seek to achieve though group or association captives that could not be met through single-parent captives or existing risk-sharing arrangements?

Q4. What factors might prevent smaller firms from participating in captive-style risk-sharing arrangements, and how could group or association captives reduce those barriers while maintaining appropriate prudential safeguards?

13.12 Legal structure: the legal form of a group or association captive may have implications for governance, member incentives, surplus distribution and outcomes in insolvency.

Q5. What forms of legal structure (for example, companies limited by shares or companies limited by guarantee) would stakeholders expect to use for group and association captives, and why?

13.13 Regulatory design: group and association captives involve pooled ownership and insured risks which may give rise to additional prudential risks.

Q6. What additional safeguards, relative to the proposals for the single-parent regime in this CP, may be necessary to address the risks associated with pooled ownership and insured interests?

Q7. How should capital and governance requirements and expectations differ from the proposals applicable to single-parent captives?

Q8. Which features of group and association captives are most relevant in determining appropriate prudential expectations?

13.14 Policyholder protection and FSCS: group and association captives may insure a broad range of firms, potentially including smaller or less sophisticated policyholders.

Q9. To what extent, if at all, should group or association captives be permitted to insure smaller or less sophisticated policyholders, and what implications would this have for policyholder protection and potential exposure of the FSCS?

13.15 Mutual insurers: The PRA recognises some similarities between mutual insurers and group and association captives.

Q10. What implications, including competition, competitiveness or prudential considerations, should the PRA consider in relation to mutual insurers when assessing the potential development of group or association captive structures?

Q11. Are there circumstances in which group or association captives could materially affect competition with mutual insurers, and how should the PRA take account of this when considering future policy development?

Q12. Are there circumstances in which group or association captives might transition into mutual insurers, or vice versa, and what regulatory considerations should the PRA take into account in managing such transitions?

Protected cell companies

What are PCC captives?

13.16 In several leading captive domiciles, some captives are structured as protected cell companies (PCCs). A PCC is a single legal entity comprising a ‘core’ and legally distinct ‘cells’. The core is responsible for the PCC’s overall governance and administration. The assets and liabilities of each cell are legally segregated from those of other cells and from the core. This segregation is intended to ensure that, in insolvency, the creditors of one cell have recourse only to the assets of that cell.

13.17 PCCs are often established and managed by specialist captive managers and insurance brokers. In these structures, individual cells may be ‘rented’ to separate organisations to meet their captive insurance needs, enabling those organisations to access captive arrangements without establishing and operating a standalone insurer.

13.18 In the UK, PCC structures are currently available for insurance risk transformation through insurance special purpose vehicles (ISPVs), but are not available for insurers more generally. The PRA is working closely with HMT to support the development of legislation that would allow PCCs to be established as insurers. This would enable the PRA to develop a framework for captive PCCs.

Areas for discussion

13.19 This discussion focuses on single-parent PCC captives. The PRA considers that the framework for single-parent captives set out in earlier chapters of this CP would be broadly appropriate for PCC captives, with modifications where necessary to reflect the PCC structure (including the relationship between the core and the cells, and differing FSCS implications). The questions below are intended to gather views on those potential modifications. The PRA notes that PCC features and legal arrangements vary across jurisdictions and that the PRA’s approach would depend on the final legislative framework.

Q13: How should the financial resources framework proposed in this CP (including capital requirements and capital resources) be applied to the core and the cells? In particular:

• Should the core hold the baseline capital requirement, and the cells hold the captive capital requirement?
• How should the PRA address the resulting risk of cells holding no cash assets?
• What arrangements should apply where a cell’s loss exceeds its allocated assets?

Q14: How, if at all, should the governance and other proposals in this CP be adapted for PCC captives, given the relative complexity of PCC structures? For example:

• Which responsibilities should sit with the PCC board, each cell owner, the captive manager and any outsourced provider?
• What additional governance requirements should apply as the number, size or risk profile of cells increases?
• What controls should apply where the same captive manager, directors, actuary, claims handler, reinsurer or fronting insurer serves multiple cells?
• How should the PRA account for operational risks that may arise from managing a larger number of cells (for example, risks related to outsourcing, data, systems and controls, and effective oversight)?

Q15. How should the reporting requirements for captives be modified for PCC captives? In particular, what cell-level data should the PRA request?