HMT advances risk transformation reform, but defers key opportunities
Key takeaways:
- HM Treasury (HMT) has published its response to the July 2025 consultation on changes to the UK risk transformation and protected cell company regimes. Whilst HMT will take forward many of the (much needed) reforms, some have been deferred.
- For risk transformation, HMT will broaden the range of funding mechanisms, increase flexibility at authorisation, give the PRA additional powers and permit protected cell companies (PCCs) to enter into multiple contracts. That said, HMT will not permit non-insurers to cede risk directly to transformer vehicles for now.
- PCCs will be permitted to underwrite (re)insurance. However, HMT will not at this stage permit dual-use PCCs (i.e. a single PCC carrying on both risk transformation and insurance activities).
- The green-lit reforms are a positive (albeit overdue) step. Whilst some changes are being actioned in the Financial Services and Markets Bill others will progress “in due course”. Given the Government’s stated ambition for the UK “to be the location of choice for complex and specialty risk”, we would have hoped for greater speed in implementing all of these reforms.
Risk transformation regime
HMT’s response delivers a meaningful, if still incomplete, modernisation of the UK risk transformation regime. First, the government will take forward reforms to make the funding requirements for transformer vehicles more flexible. This will give the PRA broader discretion over valuation methodologies of transformers and to expand what constitutes acceptable collateral and eligible assets.
Although transformers will still need to hold assets equal to their liabilities, investors will no longer need to ensure that all funding is fully paid into the vehicle. Instead, investors could fund transformers by putting up alternative collateral (i.e. a letter of credit) which relieves them of having to commit capital up front.
The government will also amend the Risk Transformation Regulations 2017 so that permission-limiting conditions are no longer automatically required to be imposed on transformers at authorisation. This will enable the PRA to set more targeted and proportionate limitations based on a transformer’s bespoke business plan. In addition, PCC cells will be able to enter into multiple contracts with multiple counterparties, which should improve the utility of more sophisticated structures.
Whether these reforms translate into a materially more usable regime is a separate question. Much will depend on how the PRA exercises its broader discretion in practice. A more permissive statutory framework will not of itself improve the UK’s competitive position if authorisation remains slow or supervisory expectations remain conservative.
HMT has deferred the proposal that would have allowed non-insurers, such as corporates and public bodies, to cede risk directly to transformer vehicles, notwithstanding apparent market support and international precedent. More work in this respect is promised, but without concrete timelines it feels that this reform could be lost in the long grass.
PCCs as insurance undertakings
HMT’s response to allow PCCs to operate as captive insurance undertakings is best understood as part of the wider UK captive reforms (see our previous captive updates here and here). This would make the future UK captive regime more accessible and scalable. For example, it would allow captive managers to establish multiple segregated cells for different insureds within a single legal entity, reducing cost, improving speed to market, and widening access to captive structures for organisations that may not wish to incur the expense of a standalone insurer. For the UK market, that is a sensible and commercially attractive development, particularly if captives are intended to be available to a broader range of businesses rather than only the largest corporates.
However, the reform is limited in scope. HMT has decided not to progress broadening the potential applications for PCCs beyond captive insurance for use in other sophisticated insurance operations (such as fronting arrangements and collateralised reinsurance) on the basis that the complexity involved poses potential risks.
What’s next?
The direction of travel in HMT’s response is encouraging. For green-lit reforms, the test is now implementation. The package depends on a combination of primary and secondary legislation, and regulatory follow-through. Its success will therefore depend not only on what HMT has accepted in principle, but on the way in which the government and the regulators enact and administer the reformed regime. This will dictate whether the UK can deliver a regime that is at least as competitive as other jurisdictions.
However, the deferral of certain key proposals makes achieving competitiveness more difficult. They do not feel aligned with Chancellor Reeves’ exhortation to go further and faster and HMT’s assertion that the UK “must be poised to seize potential opportunities” in the global market.
Tom Gibbons, Trainee Solicitor, assisted in the preparation of this briefing.
