- The UK’s captive insurance consultation closed in February 2025, proposing a regime for direct-writing and reinsurance captives, with restrictions on life and compulsory lines.
- While third-party captives were not included, growing FCA scrutiny on commissions may open the door in future in cases where insurance distributors look to earn more value by participating in insurance risk.
- South Africa’s third-party captive regime proves how successful this model can be, but only with the right technology in place to support scale, innovation and collaboration between captive insurers and owners.
The captive insurance consultation
In February 2024, we wrote about the UK government’s planned consultation on introducing a captive insurance regime - a significant development with the potential to reshape the insurance landscape in the UK.
On 14 November 2024, the Chancellor of the Exchequer announced a 3-month consultation on the captive insurance regime. Access the consultation paper here.
The consultation period ended on 7 February 2025 but no announcement has been made yet on next steps. We’ll unpack the key proposals in the consultation paper in this blog.
The UK’s need for a captive insurance regime
The consultation paper noted that while the global captive insurance market is fast-growing, most captives are established offshore rather than in the UK. Around 500 UK-associated captives are currently estimated to be located in offshore jurisdictions, like the Isle of Man, Guernsey and Bermuda.
The government has received representations from the industry calling for a new approach to the regulation of captive insurance companies in the UK, on the basis that this could support the growth of the UK insurance market.
A new captive regime would benefit companies interested in establishing captives to do so in the UK rather than offshore, but may be less effective at persuading established captives to re-domicile to the UK.
The UK government’s current approach to captive insurance
Article 10 of the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001 (RAO) already permits the establishment of captive insurers in the UK.
However, the UK is perceived to be unattractive as a captive domicile because UK-resident captive insurers are subject to many of the same application, authorisation, governance and capital requirements as other insurers and reinsurers, like Solvency II.
They are also subject to the same ongoing compliance and reporting requirements as insurers and reinsurers.
This approach negates the main benefits of establishing a cell captive, which are lower capital requirements and fewer compliance hurdles compared to obtaining and holding an insurance licence.
The proposed UK captive insurance regime
Captive types
According to the consultation paper, stakeholders have called for different regulations for direct-writing captives and reinsurance captives.
- A direct-writing captive is a captive insurer that insures the risk of one or more of its group members.
- A reinsurance captive is a captive insurer that reinsures the risk of one or more of its group members.
The government called for flexibility, and that adding further categories in future would be acceptable and beneficial should the market develop.
Business lines
The government has also proposed limiting captive insurers’ ability to write certain lines of insurance business. Their ‘initial view’ is that there are strong arguments that captives should not be able to write life insurance or compulsory lines of insurance.
With regards to life insurance, they argue that life insurance policies generally have long-term liabilities to third parties and that insurers are therefore subject to a strong regulatory regime which provides high certainty that future claims will be met.
With regards to compulsory lines, they argue that this insurance is required by law or regulation in order to protect third parties, like employer’s liability or motor insurance, and therefore should not be included in a captive insurance regime.
A missed opportunity - lessons from South Africa
We believe that a regulatory framework that also caters for third-party captives may allow the UK government to capitalise on a significant missed opportunity to facilitate wider participation in the insurance market.
South Africa provides a good illustration of the potential of captive insurance.
Third-party captives
South Africa is one of only a handful of jurisdictions worldwide whose regulations permit both first-party captives (essentially direct-writing captives) and third-party captives.
Whereas first-party or direct-writing captives are used to insure the risks of the captive owner’s group members, a third-party captive may be used by a captive owner to insure the risks of third parties - i.e. its customer base, non-affiliated companies or the general public.
Third-party captives enable non-insurance businesses to offer insurance to clients and share in the economic returns of their insurance business as captive owners, while the captive insurer is accountable for regulatory compliance and insurance licence requirements.
Commissions: to cap or not to cap?
A key nuance that makes third-party captives particularly attractive in the South African market is that broker commissions are capped. For example, commission on commercial lines insurance is capped at 20% of premiums.
Capping commissions means that distributors are incentivised to look elsewhere in the value-chain for returns. In the case of third-party captives, by sharing in the economic risks and profits of insurance businesses as captive owners.
For as long as commissions remain uncapped though (only subject to Consumer Duty and the fair value from services requirement), there is no real justification for introducing a third-party captive regime in the UK.
Whether that continues to be the case remains to be seen as commissions have faced increased scrutiny by the FCA in recent times.
In 2024 the FCA launched a market study into the distribution of pure protection products. As part of the study, the FCA will be examining the incentives created by commission structures, amid concerns that commission practices may not represent fair value to retail consumers, notably where premiums are raised to pay an intermediary more commission. The study findings and proposed next steps will be published by end-2025.
Similarly, in April 2023, the FCA conducted a market study into broker remuneration for multi-occupancy buildings insurance.
On the back of that study, where the FCA found that broker remuneration can be as high as 60% of total premium, a number of the most prominent insurance brokers in this segment voluntarily pledged to cap retained commissions at 15% of total premium on buildings with known fire safety issues.
Should commission caps be introduced, a third-party captive regime would offer a neat way for distributors to preserve their margins by facilitating their broader participation in insurance and investment profits, while at the same time ensuring fair value for customers.
The third party captive model has proven extremely successful in South Africa, as it has allowed non-insurance businesses like retailers, banks, telecoms and other affinity brands to rapidly launch insurance products specifically tailored to their customer bases.
Proven insurance software for captive insurers
We eagerly await the outcome of the government’s consultation process on captive insurance and continue to monitor developments relating to caps on commissions.
Should the FCA introduce a captive insurance regime that makes establishing a captive insurer in the UK more attractive and the trend towards capping insurance commissions continues, the two sets of regulations may converge to position third party captives as an enticing solution for insurance distributors.
In the meantime, our years of experience working with the most prominent captive insurers and captive owners in South Africa has shown that investing in modern, scalable insurance software is crucial.
Insurance technology should not only support innovation in product and distribution, but also enable seamless communication and collaboration between captive insurers and captive owners.
Having proven, trusted insurance technology already in place that serves captive insurers and owners at scale, whilst packaging regulatory, compliance and reporting complexities behind easy-to-use APIs will be a significant advantage should the regulations change.
You can find out more about how we have helped captive insurers and captive owners grow their businesses here.
