Planned reforms to the UK’s insurance-linked securities (ILS) and captive insurance frameworks are unlikely to impact the credit profiles of London market insurers in the near term, according to Fitch Ratings.
However, the rating agency warned that the changes could shift risk into less regulated corners of the market over time.
The proposals, announced as part of the UK government’s wider push to boost financial services competitiveness, aim to attract more ILS and captive insurance business by easing regulatory requirements. The government is looking to bring the UK more in line with jurisdictions such as Bermuda and the US for ILS, and France and Canada for captives.
While the reforms are not expected to take effect until 2027, Fitch said existing regulatory standards will continue to apply in the interim. Most of the new activity is likely to come from business redomiciling from other markets rather than a significant increase in risk appetite from UK insurers, it added.
Insurers are expected to stay involved in ILS and captive arrangements as facilitators or structurers, retaining some control over underwriting and risk oversight.
Key elements of the reform package include proportionately lower capital requirements for ILS vehicles and captives, faster authorisation processes, reduced fees, and lighter reporting obligations than those faced by fully regulated insurers and reinsurers. The Financial Conduct Authority and Prudential Regulation Authority are expected to set out detailed rules in 2026 ahead of implementation the following year.
Fitch cautioned that, once in place, the new framework could result in growing pockets of risk falling outside the core regulated insurance sector. These risks would either be held by institutional investors funding ILS vehicles or remain on the balance sheets of corporates running captives, subject to lighter regulatory oversight. This shift could make it more difficult for regulators and market participants to track how risk is distributed across the system.
A central feature of the proposals is a two-tier approach to captives, distinguishing between direct-writing and reinsurance models. Direct-writing captives insure risks within their corporate groups, while reinsurance captives take on those risks via a regulated fronting insurer. The split is intended to allow for more targeted supervision, with reinsurance captives likely to face fewer regulatory requirements.
The reforms also expand the scope of ILS activity by allowing transformer vehicles to accept risk from multiple counterparties, including non-insurers. Similarly, protected cell companies will be permitted to take on risk from multiple clients, a move that could make alternative risk transfer more accessible to smaller firms. However, Fitch noted this could increase the risk of contagion between cells.
Certain lines of business will remain outside the new regime. Captives domiciled in the UK will not be allowed to write life insurance policies, except for select group life products under regulatory review. They will also be restricted from underwriting compulsory insurance lines such as motor and employer’s liability on a direct basis, although reinsurance structures may be allowed where a fully authorised insurer holds the ultimate risk.
