The UK government is actively exploring the establishment of a captive insurance framework to enhance the country’s appeal as a hub for businesses seeking efficient risk management solutions. Beinsure analyzed the report and highlighted the key points.
This initiative aims to provide companies with greater control over their insurance needs by allowing them to create their own insurance entities, known as captive insurers.
By developing a supportive regulatory environment, the government seeks to strengthen the UK’s position in the global insurance market and offer firms more tailored and cost-effective options for managing their risks.
The goal is to strengthen the UK insurance market
Rachel Reeves, Chancellor of the Exchequer, announced the government’s plans to consult on a new framework for UK-based captive insurance companies. The goal is to strengthen the UK insurance market and make it a more attractive hub for firms needing effective risk solutions.
The announcement was part of a reform package designed to bolster the UK’s position in global financial services.
The government outlined five key growth areas: FinTech, sustainable finance, asset management and wholesale services, insurance and reinsurance, and capital markets.
The strategy underscores the importance of collaboration with international partners in ensuring the sector’s success.
Additionally, the Chancellor unveiled pension system reforms and steps to establish a sustainable finance regulatory regime aimed at driving investment in businesses, infrastructure, and clean energy.
A captive insurance framework allows companies to create their own insurance entities, known as captive insurers, to cover specific risks. This approach offers greater control over insurance costs and coverage, enabling firms to tailor policies to their unique needs.
Captive insurers can be structured in various ways, including single-parent captives owned by one company, group captives formed by multiple organizations, and cell captives that segregate assets and liabilities within a single entity.
Establishing a captive involves careful planning to address regulatory, tax, and operational considerations, ensuring compliance with legal requirements and alignment with the company’s risk management objectives.
Captive insurance: self-insurance and risk management
A captive insurer is an entity that insures or reinsures the risk of other companies within the same group. Typical users are large, often multi-national, companies and professional services firms, although smaller businesses and public sector entities also establish captives.
With sustained interest from stakeholders and in the context of a rapidly growing global captives market, the Government wishes to understand the potential of a new approach to captives to support the growth and international competitiveness of the UK’s insurance market.
Typical users of captive insurance include large, often multinational companies and professional services firms. Smaller businesses and public sector entities also establish captives.
Captive insurance:
- Provides an alternative way for businesses to insure emerging or novel risks or to replace traditional commercial market coverage.
- Enables groups to retain premiums and gain direct access to reinsurance markets, potentially lowering costs compared to using commercial insurance. This can be particularly advantageous in hard markets with restricted insurance capacity.
- Helps groups manage their risks more effectively and reduce exposure.
Captive insurance is a rapidly expanding global market
Around 7,000 captives existed, generating premiums close to $69 bn. Global premiums are expected to reach $161 bn by 2030.
Despite widespread use among UK and international companies and the UK’s prominent insurance sector that supports captive establishment, captives are often domiciled abroad.
The London Market Group (LMG) welcomed the announcement. In a statement, LMG highlighted the potential benefits, emphasizing that a UK regime could provide a vital risk management tool for both UK and international firms, enhancing London’s global stature in risk transfer and insurance.
The growth in the global captive insurance industry, with premiums projected to hit $161 bn by 2030. Wagstaff urged the government to engage with key stakeholders to shape a framework that will help the UK market thrive.
Caroline Wagstaff, CEO of the LMG
Julia Graham, CEO of AIRMIC, pointed out the critical role captives play in long-term risk financing strategies. She emphasized London’s global reputation in insurance and argued for a proportionate regulatory regime to support captives.
Chris Lay, CEO of Marsh McLennan UK, called the consultation a crucial step toward making the UK an appealing destination for captive insurers (see How the New Solvency II Reforms Boost the UK Insurance Market?).
He noted the need for a regulatory framework that can compete internationally, underscoring its potential to boost the UK market and showcase the nation’s commitment to innovation.
Establishing a proportionate and competitive UK captive framework could deliver a major boost to the UK insurance market, demonstrating our innovation and signalling we are open for business.
Chris Lay, CEO of Marsh McLennan UK
The United Kingdom’s insurance market holds global importance, offering world-class insurance and reinsurance services. It ranks as the third-largest insurance and long-term savings market globally and leads in Europe.
The London Market stands as the world’s largest hub for commercial and specialty risk, covering complex threats like cyber and terrorism while attracting business from over 200 territories.
The UK government aims to boost the insurance sector’s growth
The UK government aims to boost the sector’s growth and global competitiveness. By doing so, it seeks to strengthen the insurance market’s contribution to the UK economy and enhance its international standing.
Captive insurance, a self-insurance and risk management method, is growing rapidly worldwide. However, most captives are not based in the UK.
Industry stakeholders have urged the government to consider regulatory changes to make the UK a more appealing destination for captive insurance companies. This move could benefit the insurance market and, in turn, support broader economic growth.
This consultation comes amid broader financial market reforms. The Financial Services and Markets Act (FSMA) 2023 will replace assimilated financial services law with new rules set by independent regulators, following a framework established by the government and Parliament.
Additionally, FSMA 2023 introduces a secondary objective for the Financial Conduct Authority (FCA) and Prudential Regulation Authority (PRA) to promote the UK’s international competitiveness and long-term economic growth.
FAQ
The UK government is considering a captive insurance framework to make the country a more attractive hub for businesses seeking efficient risk management solutions. This initiative aims to give companies greater control over their insurance needs by allowing them to establish captive insurance entities.
Captive insurance provides an alternative way for businesses to manage emerging or novel risks. It allows them to retain premiums and access reinsurance markets directly, potentially reducing costs. It also offers tailored insurance coverage and greater control over risk management.
A UK-based framework could strengthen the country’s position in the global insurance market. It would offer more cost-effective and customizable insurance solutions, attracting both domestic and international businesses, and bolstering the UK’s reputation as a global leader in insurance services.
Rachel Reeves announced that the government plans to consult on a new framework for UK-based captive insurance companies. This consultation is part of a broader package of financial services reforms to enhance the UK’s appeal and international competitiveness.
The strategy identifies five key growth areas: FinTech, sustainable finance, asset management and wholesale services, insurance and reinsurance, and capital markets. It emphasizes the importance of collaborating with international partners to ensure the sector’s success.
Industry leaders, such as the London Market Group (LMG), Marsh McLennan UK, and AIRMIC, have expressed support. They emphasize that a proportionate and competitive regulatory regime is essential to make the UK a favorable destination for captive insurance. This framework could boost the market and demonstrate the UK’s commitment to innovation.
The UK ranks as the third-largest insurance and long-term savings market globally and the largest in Europe. London serves as a key hub for commercial and specialty risks, covering complex threats like cyber and terrorism, and attracts business from over 200 territories worldwide. The government aims to further strengthen this position through its planned reforms.
