When the PRA and FCA published their consultation for a tailored UK captive insurance regime, the headline news was universally welcomed. A 4-to-6-week authorisation timeline target, relief from Solvency II reporting, a simple 10% factor-based capital requirement, and improved flexibility for Material Non-Group Undertakings (MNGU).

For risk managers, this is a game-changer for Joint Ventures. The PRA is offering genuine commercial flexibility here, a sharp contrast to the rigid captive coverage rules often found in other leading domiciles.

On paper, the turnstiles to the London market are open, with almost no entry fee. But if you look under the hood of the PRA’s 62-page Supervisory Statement, a more nuanced reality emerges.

The “Hidden” ORSA

The 10% factor-based capital framework, the Captive Capital Requirement (CCR) is brilliant in its simplicity, mirroring the highly successful approach taken by domiciles such as Vermont.

However, the PRA’s supporting guidelines includes a critical caveat: PRA draft guidelines require an additional step – UK captive boards to consider if the UK captive should hold capital resources in excess of CCR, particularly for an underwriting portfolio with limited claims experience or long-tail risks, of course, having regard to the nature, scale and complexity of the captive.

This feels remarkably like a “Pillar 2” Own Risk and Solvency Assessment (ORSA).

While this doesn’t derail the immense positivity of the regime, it means the 10% headline is just that, a headline. Executing a UK captive strategy may require UK captive Boards to conduct an “ORSA” type exercise but perhaps in a more prescriptive way than under Solvency II.

Although considered unlikely, the proposed requirement to trigger excess capital under a non-exhaustive shortlist may be seen as more uncertain than the EIOPA ORSA guidelines.

The “Should I stay or should I go now” Problem

For UK corporates currently utilizing legacy captives in the Isle of Man or Guernsey, the UK regime offers a compelling reason to come home. However, corporate risk managers will be aware of the existing composition of their captive boards and the inherent conflict of interest in deciding to move onshore and how their existing local iNED’s can truly offer an independent point of view.

Most captives either sitting in offshore or onshore domiciles often have at least one  Independent Non-Executive Directors (iNEDs). The UK regime makes them optional from the start, however there is an expectation that UK captives appoint an iNED to the board, where this is proportionate to the nature, scale, and complexity of the firm.

Corporate risk managers will also recognise the advantage of having a much wider pool of iNED talent and experience from the London market, given the expectation that UK captives will adhere to robust governance standards.

The Redomiciliation Reality

Finally, there is currently no “magic wand” transfer of domicile law to drop an offshore captive directly into London. Redomiciling will require a tactical roadmap to shift liabilities into a newly established UK entity before closing the offshore shell.

The PRA’s proposals present a historic opportunity, but the framework remains a work in progress. As the industry responds to the consultation, it is clear that bringing a captive onshore will require more than just reading the top-line benefits.

Success will depend on carefully tracking how these fine-print details evolve and more importantly complement your captive strategy.