Employee benefits such as group life and health insurance schemes will only be permitted on a reinsurance basis under the UK’s new captive insurance regime with another primary insurer being required.
Meanwhile, pension schemes will be completely excluded from the framework due to their complexity.
The plans were proposed in joint consultations by the Prudential Regulation Authority (PRA) and Financial Conduct Authority (FCA).
While the regulators acknowledged employee benefit schemes were less complex compared to offering policies direct to consumers, they argued such policies could significantly impact those insured and so greater consumer protection was required.
The group life and employee benefits sector petitioned to be included in the captives regime having originally been excluded, and its inclusion was confirmed last summer.
The first consultation on the UK captive insurance framework published in November 2024 had proposed blocking captives from covering all types of life insurance.
This latest version proposes only allowing them to do so on a reinsurance basis with another primary insurer also participating.
Employee benefits restrictions
In its consultation, the PRA noted that HM Treasury’s previous consultation and its own work with subject expert groups had “demonstrated material demand for UK captives insuring the group’s employee benefits programmes”.
It noted there was no single consistently used definition of employee benefits but expressly referenced health and medical cover, group life insurance, group income protection and group critical illness.
Explaining it’s decision to limit the scope of coverage for these plans, the regulator said: “These policies are provided on a group policy basis, and represent less complex risks, compared to offering these products directly to individuals.
“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.”
The regulator also emphasised that UK captives would only be permitted to provide employee benefits coverage 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,” it added.
Other life insurance and pensions
The PRA made clear that UK captives would 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,” it said.
Meanwhile, pension schemes will be fully excluded from participating in the captives regime.
“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,” it added.
The consultation closes on 14 October 2026, ahead of the launch of the new regime in summer 2027, after consideration of respondent feedback.
As part of the consultation the FCA confirmed its Consumer Duty would not apply to captive arrangements.
