HM Treasury has published its response to the July 2025 consultation on reforms to the Risk Transformation Regulations 2017 ("RTR 2017"). The reforms form part of the government's broader Financial Services Growth and Competitiveness Strategy, which has the objective of strengthening the UK's position as a leading domicile for insurance-linked securities ("ILS") and other alternative risk transfer structures.

The response appears to be a welcome recalibration of the UK framework to bring it more into line with other leading ILS markets such as Bermuda in key areas rather than a wholesale redesign. The direction of travel is clearly towards greater regulatory flexibility coupled with principles-based PRA oversight, designed to unlock reinsurance activity that has historically migrated offshore. However, the staged approach to reform (particularly in relation to protected cell companies ("PCCs") and captives) indicates that the UK is prioritising legal and regulatory certainty over speed of implementation. This article considers the reforms and their impact on the UK insurance sector.

Background

The UK risk transformation regime enables insurers to transfer risk to capital markets via transformer vehicles, typically structured as PCCs. While the RTR 2017 established a credible framework, it has been regarded by the market as less flexible than competing regimes, particularly in jurisdictions such as Bermuda, which has resulted in limited uptake of UK-domiciled structures. The consultation sought to address these concerns by reducing regulatory frictions, broadening funding and structuring options, and supporting UK innovation in complex and specialty risk transfer markets.

The government now confirms that it will proceed with most of the proposed reforms focusing on increasing flexibility for transformer vehicles, aligning the UK regime more closely with international competitors, and expanding the role of PCCs, including in the forthcoming UK captive insurance framework. However, certain proposals, in particular permitting the direct assumption of risk from non-insurers have been deferred pending further analysis and there is no mention of life ILS.

Key reforms to the risk transformation regime

1. Clarification of funding requirements

Outcome: Proceeding via primary legislation

The government will legislate to clarify that the PRA has greater discretion over funding requirements for transformer vehicles, including the ability to move away from a strict requirement that all funding be fully paid-in. Instead, the PRA will determine permissible funding structures, valuation methodologies and eligible assets through its rules. Importantly, the core prudential safeguard will be retained, with transformer vehicles required to hold assets at least equal to their maximum liabilities.

This reform is likely to be one of the most commercially significant. It introduces a level of regulatory flexibility that has been absent from the UK regime, since the prudential requirements were hard-wired into legislation, should align the UK more closely with offshore ILS markets where alternative collateral and contingent funding structures are common. For market participants, the key issue will be how the PRA exercises this discretion in its rules and supervisory approach, in particular, whether it adopts a permissive stance compared to leading jurisdictions or retains a relatively conservative interpretation.

2. Increased flexibility at authorisation

Outcome: Proceeding (amendments to Regulation 7 RTR 2017)

The government will proceed with legislative reforms to remove the requirement for the PRA to impose mandatory limitations on permissions at authorisation. Specifically, the government will amend Regulation 7 of the Risk Transformation Regulations 2017 so that the PRA is no longer required to limit a transformer vehicle's permissions at the outset. Instead, the PRA will be empowered to determine, in line with its statutory objectives, whether it is appropriate to incorporate specific operational limitations. This change should allow a more flexible, business-plan-driven approach to supervisory approval, which is intended to reduce execution risk and administrative burdens. This is particularly valuable for PCC structures that evolve over time to support shifting cedent and investor preferences.

From a practical perspective, this reform addresses a long-standing market concern that the UK authorisation process is overly rigid compared to competitor jurisdictions. The PRA has already introduced an accelerated pathway for certain ISPV applications, with a 10-day target for approvals. The amendment to Regulation 7 will, however, shift the regulatory burden, placing greater reliance on ongoing supervisory oversight and robust corporate governance. While the reform offers a more commercially aligned approach to deal structuring, the ultimate extent of its benefit will depend entirely on PRA responsiveness and the efficiency of timelines for any future variation of permissions. Accordingly, regulatory execution speed remains a critical benchmarking factor for market participants when selecting a domicile.

3. Expanded use of PCC cells

Outcome: Proceeding via secondary legislation

The government will permit individual cells of a PCC to enter into multiple contractual arrangements with multiple cedents, removing the existing "single transaction" constraint. No additional legislative safeguards are proposed, with reliance instead placed on existing PRA rules and insolvency frameworks. Although technical, this reform has the potential to materially enhance the commercial utility of UK PCC structures. It could enable more efficient platform models and multi-programme arrangements, which are standard features in more mature ILS markets.

From a legal structuring perspective, it also reduces the need for duplicative vehicles and associated transaction costs. The choice to forego additional statutory protections does, however, place heavy reliance on the core statutory cell-segregation principles established under UK insolvency law. These foundational ring-fencing principles have been recently tested in caselaw and found to be resilient in other PCC jurisdictions, where courts have consistently upheld the statutory separation of cellular assets against general creditors during liquidations. The absence of specific UK legislative safeguards will also place increased importance on PRA expectations regarding risk segregation, counterparty default, and corporate governance. For any new UK PCC, these will be the primary areas of legal risk and due diligence.

4. No immediate expansion to non-insurers

Outcome: Not proceeding (for now)

The proposal to allow transformer vehicles to assume risk directly from non-insurers has been deferred, with the government citing the need for further work on safeguards and potential overlap with other regulatory regimes. While this was one of the more ambitious aspects of the consultation, the decision to defer is consistent with a cautious approach to perimeter issues.

For now, the continued requirement for an insurer preserves the existing market structure. From a statutory perimeter viewpoint, deferring this expansion avoids a complex overlap with the regulated activity of "effecting and carrying out contracts of insurance" by unauthorised entities under FSMA, therefore, corporate capital market participants must continue to use an authorised fronting carrier. Although further reform could materially expand the UK's market in due course, the immediate legal complexities surrounding consumer protection and strict market boundaries justify the Treasury's current preservation of the status quo.

PCCs and captive insurance

5. Expansion of PCCs to insurance activities

Outcome: Proceeding via primary and secondary legislation

The government will introduce primary and secondary legislation to allow PCCs to effect and carry out insurance contracts, in order to facilitate their use within the new UK captive insurance framework. The framework will therefore provide for two distinct types of PCC: the existing risk transformation PCC and a new insurance PCC that can write insurance contracts directly.

The government acknowledges concerns raised by respondents about preventing a single PCC from undertaking both risk transformation and insurance activities, noting that other jurisdictions allow these activities to be separated at cell level. However, because a PCC is a single legal entity, permitting dual use raises both regulatory and tax questions about how it could carry out different regulated activities with separate regulatory and tax treatments, even when separated into individual cells. As such, the government does not intend to legislate for dual-use PCCs at this stage.

6. Link to the UK captive insurance regime

The PCC reforms are designed to underpin the new UK captive insurance regime scheduled to launch in summer 2027. The PRA has also confirmed that it will consult on the new captives regime in Summer 2026. However, PCC structures will not be available when the regime goes live. The government has acknowledged that legislative changes require both primary and secondary legislation and has committed to working closely with the PRA to ensure that PCCs can be incorporated at pace once the necessary legislation is in place.

Early adopters should be aware that PCCs will not be available at launch, though the government intends to legislate for them as soon as Parliamentary time allows. However, once the primary legislation bridges this gap, PCCs are likely to play a central role in enabling the UK to compete in the global captive market, particularly for large corporates seeking flexible and centralised risk retention solutions.

7. Wider uses of PCCs

Industry respondents identified broader applications for PCCs (including fronting and collateralised reinsurance), but the government has indicated that these will not be prioritised immediately. The government has confirmed that these options are not precluded in legislation, and the regulators will be able to consider the scope of options beyond captives in due course. This reflects a measured approach to reform, with a focus on establishing PCCs within the captive framework before expanding into more complex, multi-tiered wholesale insurance operations. Over time, the ability of regulators to accommodate these broader applications will be an important determinant of the UK's competitiveness.

Next steps

Overall, the reforms make meaningful improvements to the UK ILS regime that have the potential to help achieve the UK's ambition to be a leading international domicile for ILS. However, the UK's competitiveness will also depend on implementation and in particular regulatory execution, tax treatment, and transactional efficiency, all of which remain critical factors in client domicile decisions. Implementation will require both primary legislation (to clarify funding and enable PCC insurance activities) and secondary legislation (to deliver the detailed reforms). In parallel, the PRA and FCA are expected to develop supporting rule changes, including consultation on reforms to the authorisation process and supervisory approach. The PRA has indicated that it will continue to work with HM Treasury on further reforms to ensure the UK remains an internationally competitive ILS hub. The sequencing and timing of these changes will be closely watched by the market.