Mansion House Speech: Points of interest for the insurance sector

The Chancellor, Rachel Reeves, delivered her first Mansion House speech on 14 November. The message was clear – the Government wants to achieve secure and sustainable economic growth, and competitiveness and growth in the UK’s financial services sector is key. Regulatory changes made after the financial crisis to eliminate risk-taking have ‘gone too far’: “the UK has been regulating for risk, but not regulating for growth…now is…the moment to rebalance our approach”. There is a push for the regulators to focus on this and the PRA and FCA have received growth-focused remit letters asking them to “enable informed and responsible risk-taking by authorised firms and customers”.

The Chancellor says that the UK’s status as a global financial centre cannot be taken for granted and she aims to rebalance the system, setting the financial services sector up to innovate, grow and seize opportunities for investment. Higher regulatory standards will be maintained, but parts of the regulatory system will be rebalanced to drive economic growth and competitiveness. The UK’s (re)insurance markets in particular have been identified as being “pivotal in supporting growth”, and are one of the five priority growth opportunities that the Government has identified in the financial services sector.

The Chancellor’s speech was accompanied by a raft of publications from HMT, PRA and FCA. We have sought to draw together those publications that will be of particular interest to the insurance sector, including:

• HMT consultation on captive insurance
• PRA consultation on changes to the UK Insurance Special Purpose Vehicles regulatory framework
• FCA/FOS Call for Input on modernising the redress system
• HMT Call for Evidence on the Financial Services Growth and Competitiveness Strategy
• Various other points of interest 

Captive insurance: Consultation deadline 7 February 2025

The Government wants to look at a new approach to captive insurance which would “cement the UK’s position as a leading financial services centre” and has published a consultation on how the UK could become a more attractive destination for captive insurance business.

The UK’s insurance market is globally significant with a world-leading insurance and reinsurance offering. The London Market is the largest global hub for commercial and specialty risk. However, despite the widespread use of captive insurance by UK companies, captive insurance is predominantly written offshore.

UK-resident captive insurers are subject to many of the same application, authorisation, governance and capital requirements as other (re)insurers. Once established, they are also subject to many of the same ongoing compliance and reporting requirements as (re)insurers, despite their different risk profile. There have been calls for a while for changes which would make the UK a more attractive destination for captive insurance business and Lloyd’s introduced the concept of captive syndicates earlier this year.

Representations have been made to the Government for lower capital requirements for captive insurers, reduced application and administration fees, a faster authorisation process and reduced ongoing reporting requirements. However, detailed proposals in these areas would be a matter for the FCA and PRA to determine. For now the Government is focussed on:

1. Differentiating between two distinct types of captive insurer: 

• Direct writing captives: A captive insurer that insures the risk of one or more of its group members; and
• Reinsurance captives: A captive insurer that reinsures the risk of one or more of its group members.

This approach would allow for rules which differentiated between each type to reflect the differing risk profiles, and for a flexible approach to enable the potential addition of additional types of captive in the future.

2. Exclusions and limitations:

• The Government’s view is that regulated firms dealing with financial services and pensions (e.g. insurers, banking groups, pension funds and superfunds) should be excluded from establishing (and passing risk to) their own captives. This would avoid regulatory arbitrage and minimise the potential for financial stability risks.
• Certain lines of business might be excluded to simplify and speed up the implementation process, while limiting risks to participants or to financial stability that might arise from the failure of a captive. In particular, the Government thinks that life insurance and compulsory lines (such as employer’s liability and motor) should not be written by captives. This proposal pushes captives towards writing only non-life business in the UK whereas in other jurisdictions they are able to write life and non-life business. The PRA/FCA would be able to determine in future whether other lines of business should be excluded or restricted to only being written by direct and/or reinsurance captives or not by captives at all.

3. Captive managers:

• The Government’s initial view is that establishing a separate approach for captive managers would be disproportionate to the risk profile of captive business. Many potential managers of captives will already be existing insurer or intermediary groups. One option is for the FCA to continue to exercise responsibility for the ongoing regulation of captive managers, including via the SMCR regime. This approach would make the process of implementing a new captive insurance approach faster. The introduction of a new regulated activity of ‘captive manager’ may bring with it certain advantages long-term, but designing and implementing a new regulated activity would take longer and slow the down the implementation of any new captive insurance approach overall.

4. Protected Cell Companies:

• The Government is considering whether captives should also be permitted to operate via cells of a protected cell company (PCC). PCC captives could provide a more viable route for smaller companies who would not be required to create and capitalise a full captive insurance entity. This might enable the UK to attract a wider share of the global captive market.

5. Tax:

• Whilst some jurisdictions have introduced beneficial fiscal arrangements to attract captive business, HMT does not consider it a necessary component of implementing a competitive UK captive approach and does not therefore anticipate providing tax incentives. The lack of a beneficial tax regime is unhelpful relative to the offshore tax regimes.
   

UK ISPV Framework: Consultation deadline 14 February 2025

The PRA has published a consultation paper (CP15/24) on proposed reforms to the UK Insurance Special Purpose Vehicles (UK ISPV) regulatory framework. The UK ISPV regime was launched in 2017 but it has seen limited uptake, with industry feedback suggesting that the regime does not adequately support the establishment of UK ISPVs. The PRA is therefore looking to amend its current framework to enable the UK non-life insurance sector to play a more prominent role in the global Insurance Linked Security (ILS) market. Many of the PRA’s proposed changes are not uncommon in the international marketplace.

The four main changes being proposed are as follows:

1. Structural changes

• Clarification that UK ISPVs can count retained realised investments to cover the aggregate maximum risk exposure (AMRE) and that the AMRE may increase over time commensurate with the realisation of retained investment returns. This may allow for a smaller upfront investment in a UK ISPV and may avoid the need for an injection of further funds into the vehicle.
• Disapplication of the requirement that UK multi-arrangement ISPVs (MISPVS) must be formed as Protected Cell Companies (PCCs) where the MISPV assumes risks under more than one separate risk transformation transaction which constitutes a single contractual arrangement. This will create efficiencies as UK MISPVs will be able to undertake more than one risk transformation transaction (such as renewal or tranching of risks) within the same vehicle without needing to establish a PCC.
• Permitting UK ISPVs to utilise grace periods in relation to the fully funded at all times (FFAAT) requirement, in certain scenarios. This should provide UK ISPVs and cedants with improved flexibility during roll-over periods and avoid over-collateralisation during this period.
• Clarification on the use of Limited Recourse Clauses (LRCs) by UK ISPVs. Whilst the PRA has neither required nor prohibited the use of LRCs to date, its policy on their use to meet FFAAT has been unclear. The PRA is therefore seeking to rectify this through the publication of a new Supervisory Statement.

2. Process changes

• Introduction of an ‘accelerated pathway’ for the authorisation of UK ISPVs meeting certain criteria set out in the PRA’s proposed new Statement of Policy. This is likely to capture certain types of catastrophe bonds. The PRA intends to approve such applications within 10 working days of submission, expediting the current 4-6 week process.
• Simplification of authorisation for all other UK ISPVs.

3. Updates to PRA expectations of (re)insurers ceding to SPVs

• Introduction of a new Supervisory Statement setting out general expectations of UK (re)insurers using SPVs as risk mitigation. This, in particular, sets out expectations for managing the risks concerning LRCs and grace periods (as noted above).
• Clarification of expectations regarding the use of SPVs to transfer long term insurance business risks that are subject to material market and credit risk. In particular, the PRA’s proposed expectation is that UK firms should not use SPVs to transfer risks from annuity or similar business. Although the PRA notes that such transfer may be appropriate in relation to extreme mortality or healthcare risks provided certain requirements and expectations are met.

4. SMCR changes

• Introduction of a new Senior Management Function (SMF) for UK ISPVs. This will reduce the number of SMF applications required for UK ISPVs.

Potential future reforms

The PRA has identified other aspects of the UK ISPV regime that may benefit from reform but which lie outside of the PRA’s regulatory framework. This includes: (i) multiple contractual arrangements via single cells of PCCs; and (ii) limited use of letters of credit as part of the funding of a UK ISPV. The PRA is working with HMT to assess and enable reform in these areas if considered appropriate.

The PRA intends to publish its final policy on the UK ISPV framework in mid-2025.
 

Modernising Redress: Consultation deadline 30 January 2025
 

The Chancellor wants to “reduce uncertainty by delivering the right approach to redress”. The FCA and Financial Ombudsman Service (FOS) have published a joint Call for Input amidst growing concerns that the current redress framework is not operating effectively and may be having a detrimental effect on the stability of the UK financial system. Since the complaints handling rules were last reviewed in 2014, there have been several mass redress events (e.g. PPI) and an exponential rise in the number of FOS complaints brought by professional representatives (such as solicitors and claims management companies). There are concerns that not enough is being done early enough to identify issues with significant or wider implications before redress events escalate, and, when these wider issues do arise, the FCA and the FOS do not always agree on the interpretation of the FCA’s requirements and court decisions further complicate the matter.

Options for change being considered fall into two categories:

1. Changes that could be made to rules and processes in the short to medium term, including:

• Guidance in DISP to help firms identify and proactively address harm.
• Returning to a two-stage complaints handling process for firms.
• Reducing the circumstances when a final decision by an ombudsman can be requested.
• Different rules for complaints brought by professional representatives, particularly around proper evidence and complaint articulation.
• Changes to case fees for mass redress events.
• Whether the FOS should take into account any other factors when deciding what is ‘fair and reasonable’ in all the circumstances of the case.
• Extending the circumstances when the FOS may dismiss complaints, for example, where the FCA has decided to implement an industry-wide consumer redress scheme.
• Changing the time limits for referral of complaints to FOS.

2. Longer term changes, including:  

• Improving how the FCA and FOS co-operate on matters with wider implications and identify issues with wider implications.
• Granting the FOS and the FCA the power to pause the complaints handling requirements and limitation periods while the FCA carries out diagnostic work to assess the extent of harm and consider the best approach to resolve the issue.

A response to the Call for Input will be published in the first half of 2025. This is likely to contain any short, medium and longer-term changes to be explored further.
 

Financial Services Growth & Competitiveness Strategy: Consultation deadline 12 December 2024

In the Spring, the Government will publish the first ever Financial Services Growth and Competitiveness Strategy. The Strategy will provide the guiding framework through which the Government will aim to deliver sustainable, inclusive growth for the financial services sector and secure the UK’s competitiveness as an international financial centre. HMT has published a Call for Evidence which will inform the Government’s approach. In particular, HMT is seeking views on how the financial sector can drive growth, the role of regulation plays in sector growth, and ways to enhance the international competitiveness of the sector.

Through the Call for Evidence, the Government aims to gather evidence relating to:

• The scope and focus of the strategy;
• What firms see as their main growth opportunities and where they are therefore targeting investment;
• What factors matter most to firms when considering the UK as a destination to invest and grow a financial services business; and
• What factors would make the greatest difference to growing and enhancing the competitiveness of the UK’s financial centre over the next decade.

HMT is seeking to identify priority growth opportunities within the financial services sector that will support long-term sustainable growth within the sector and wider economy. The insurance and reinsurance market has been provisionally identified as one of five such growth opportunities.

The Government emphasises that maintaining a responsive regulatory approach and a supportive business environment is key to the UK’s ability to compete with other leading international jurisdictions for insurance business and to cement its position as a leading financial services hub. It flags, in particular, the positive steps that should arise from:

• The PRA’s decision to increase Solvency II application thresholds.
• The FCA’s consultation on the regulation of commercial and bespoke insurance business, which we discussed in this article.
• The Government’s consultation on captive insurance (discussed above) and the PRA’s work to simplify its approach to Insurance Linked Securities. The Government will consider what steps it might take to help further improve the UK’s Insurance Linked Securities offering, building on the PRA’s ongoing reforms.
   

Other points of interest:
 

• SMCR: HMT, FCA and the PRA will shortly publish the outcome of their SMCR review which will include a commitment to consult on removing the current Certification regime. The Government thinks the SMCR regime has helped to improve standards and accountability, but some elements have become overly costly and administratively burdensome. It therefore wishes to replace the current Certification Regime (which applies to staff below senior management level) with a more proportionate approach that reduces costs and frees up businesses to focus on growth.
• Productive assets: The Chancellor also mentioned that the PRA, HMT and the National Wealth Fund will work together to crowd-in investments by insurers in productive assets taking full advantage of the new Solvency UK regulatory regime.
• Sustainable finance: This will also be one of the Government’s five ‘priority growth opportunities’ and a package of sustainability reforms was announced, including a consultation on the UK Green Taxonomy. We discuss these reforms in more detail in this article.
• Advice Guidance Boundary Review: The FCA published an update on its Advice Guidance Boundary Review. Its focus will be on pensions and investments with consultations on these expected in December and the first half of 2025.
• FCA Handbook Review: The Chancellor referenced the outcome of the FCA’s Handbook Review which will streamline duplicative Handbook provisions and free up resources for businesses to innovate and grow.