AM Best Reviews Proposed UK Captive Insurance Regime

A proposed regulatory framework for single-parent captive insurers could give the United Kingdom a competitive position among established captive domiciles, according to AM Best's report, "UK Plans for a New Flexible and Competitive Captive Insurance Regime Take Shape."

The Prudential Regulation Authority (PRA) and Financial Conduct Authority (FCA) released the consultation paper nearly a year after plans for a bespoke UK captive framework were first announced. The consultation remains open until October 2026, and regulators are seeking to implement the framework as early as July 2027, per the report.

The current proposal applies only to single-parent captives, although regulators plan to extend the framework to other structures, including group captives and protected cell companies, according to AM Best. The regime is intended to create an internationally competitive captive market while maintaining PRA and FCA oversight.

Under the proposal, captives would be exempt from UK Solvency II requirements and instead operate under proportionately lower capital and reporting requirements, per the report. The capital requirement would consist of a baseline of £100,000 in high-quality, paid-in Tier 1 capital, plus any additional requirement exceeding that amount.

The additional requirement would equal the higher of 10 percent of net insurance liabilities or 10 percent of net written premiums. According to the report, this portion could be satisfied using Tier 1 and Tier 2 capital, with eligible Tier 2 resources including letters of credit and parental guarantees. Regulators also propose allowing intragroup loan-back arrangements.

The proposed capital framework is not expected to be significantly more capital-efficient than those in other domiciles, but it could make the United Kingdom a preferred domicile for UK companies, AM Best said. Although many captive regimes apply proportionality principles, the admissibility and permitted use of letters of credit vary among jurisdictions.

The proposed framework would establish a single type of captive authorized to conduct both direct insurance and reinsurance business, according to the report. UK captives could also write nonlife business alongside certain employee benefits business, although employee benefits could be written only on a reinsurance basis. AM Best said the ability to conduct both direct and reinsurance business under one authorization would provide flexibility because some domiciles require separate licenses.

UK corporations may consider domestic captives because of the proposed flexibility in capital and operating structures, lighter reporting requirements, and shorter processing timeframes, per AM Best. The PRA and FCA are targeting an authorization process of 4–6 weeks and have tailored regulatory requirements to reflect captives' typically lower risks.

A domestic captive could also allow a UK corporation to keep its risk management and governance activities within the country and avoid complexities associated with offshore governance, according to the report. The proposed regime would also draw upon the United Kingdom's existing regulatory framework and insurance ecosystem.

Taxation, however, is expected to be an important consideration for prospective captive parents, AM Best said. UK captives are expected to pay the standard UK corporate tax rate, while some established domiciles have comparatively lower tax rates.

The PRA has acknowledged that tax frameworks in other domiciles could affect participation in the proposed UK regime but considers changes to taxation outside its remit, according to the report. AM Best said it remains uncertain whether HM Treasury will introduce tax incentives for UK captives.

The United Kingdom would also have to develop its captive framework without the decades of experience held by established domiciles such as Guernsey, the Isle of Man, and Luxembourg, per the report. Those domiciles have established networks of third-party service providers, including captive managers, as well as existing frameworks for protected cell company structures.

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