Insurance

Consumer Duty focus for the next year in the insurance sector

Embedding the Consumer Duty remains a priority for the FCA in 2026 across multiple sectors; the insurance sector is no exception:

• As part of supporting firms to deliver good outcomes under the price and value outcome, the FCA is undertaking two market studies relevant to the insurance sector, the Pure Protection Market Study and the Premium Finance Market Study, for which an interim and final report, respectively, are expected to be published during Q1 2026; and
• The FCA remains committed to sharing its views on good and poor practices. The outcome of a review on claims handling arrangements employed by a sample of home and travel insurers has already been published. Similar reviews will continue in 2026 covering products and services, outcomes monitoring, consumer understanding, as well as further claims handling work.

Growth Agenda: captive insurers, ISPVs, and alternative life capital

The end of 2025 and into 2026 has seen an explosion of HMT and PRA reform initiatives in the insurance capital space. This is aligned with the Government’s Growth Agenda aiming to promote innovation and the competitiveness and attractiveness of the UK insurance sector:

• In July 2025 new rules for Insurance Special Purpose Vehicles (ISPVs) came into force. Among other things, the new regime allows ISPVs to: count retained realised investment returns to cover the aggregate maximum risk exposure; enter into more than one contractual arrangement without being registered as Protected Cell Companies (PCCs); and make use of grace periods in relation to the requirement to be ‘fully funded at all times’. 
• Separately HMT’s responses to consultation on the UK Captive Insurer regime in July 2025 concluded that a reformed regime should include proportionately lower capital requirements for captives and streamlined regulatory processes and reporting requirements. HMT also proposes that PCCs should be permitted to be authorised as captive insurers. The PRA and the FCA intend to consult jointly in summer 2026 on the detail of a new captive insurer regime, and target implementation in mid-2027.

Despite the PRA reiterating in these consultations its previous policy that captives and ISPVs are not suitable vehicles for life risk, the PRA signalled possible movement in a speech in September 2025, following this up with the publication of a Discussion Paper on Alternative Life Capital in November 2025. This outlines the PRA’s thinking on potential policy changes that could allow life insurers to transfer defined tranches of risk to the capital markets, including using domestic ISPVs and reinsurance sidecars, which are currently not attractive or workable. It also sets out six ‘alternative life capital principles’ the PRA will consider when reviewing any proposed transactions and their impact on the insurer.  The PRA invites comments until 6 February 2026.

Interactions between pensions and insurance

Pension policy and regulation in the UK is evolving to address retirement income challenges facing a generation with limited DB coverage and declining state support. Key aspects of this which will impact the life insurance sector throughout 2026 include:

• The FCA is reviewing its regulatory approach to reflect the shift from DB to DC pensions and the complexity of post-pension freedoms choices. Focus areas include digital tools, pension transfer processes, and overhauling SIPP rules. A consultation paper on this topic is due at the end of 2025.
• A new value for money (“VFM”) framework will introduce the publication of key metrics, public disclosures of VFM assessments, and a RAG rating system.
• The FCA proposes a new regulated “targeted support” service, enabling firms to offer tailored, non-advised guidance to help consumers make better pensions and investment decisions. This is intended to help to close the advice gap and improve outcomes under the Consumer Duty framework.

In addition, increased innovation within the market is leading to the development of new solutions:

• Competitive pressures within the bulk purchase annuity market are intensifying as funding levels improve and new entrants target smaller transactions. This is driving innovations, such as with-profits bulk annuities, which will further diversify offerings, likely tightening pricing margins and accelerating de-risking strategies.
• Hybrid solutions like “flex first, fix later” are gaining traction, combining drawdown flexibility with later-life annuitisation. These solutions can balance investment growth, longevity risk, and cognitive decline considerations, aligned with regulatory emphasis on suitable retirement options.

Solvent exit planning for insurers

The new Solvent Exit Planning regime requires insurers to prepare for a solvent exit so that it can cease insurance business in an orderly way while remaining solvent. The key new requirement is to carry out a ‘solvent exit analysis’ (SEA) and produce a living document providing a credible playbook for how a solvent wind down would be achieved in different scenarios, including at different points along the curve of deteriorating financial circumstances. There are also requirements to produce a detailed ‘solvent exit execution plan’ building on their SEA when a solvent exit becomes a real prospect.

The rules are set out in a new Preparations for Solvent Exit Part of the PRA Rulebook and Supervisory Statement SS11/24 ‘Solvent exit planning for insurers’ which in-scope insurers will need to comply with by 30 June 2026.

Innovation and AI in insurance

The EU AI Act has generated significant attention, establishing a risk-based approach to the regulation of AI which will impact insurers operating cross-border with the EU. By contrast, the UK is not currently pursuing sector-specific AI legislation. Instead, the government has adopted five cross‑sector AI principles, with sectoral regulators, including the FCA and PRA (the “Regulators”), responsible for their implementation. Similarly, there are currently no AI‑specific FCA or PRA rules, and the Regulators consider the existing framework sufficient to mitigate AI risks. In particular, firms must have regard to proportionality and consumer protection, and map AI use to the existing regime, applying high‑level principles on governance, risk management, and conduct.

Whilst the Regulators recognise the risks that accompany the use of AI within the insurance sector, and are undertaking work to better understand this, they are also cognisant of the need to refrain from overregulating in a way that stifles growth. Multiple initiatives have been introduced with a view to supporting innovation in the adoption and use of AI within the financial services industry, including AI Live Testing, the Smart Data Accelerator, and the Supercharged Sandbox.

Post-Brexit developments

Following Brexit, many insurance market participants adopted the “branch back” model in order to minimise Brexit’s impact on their operations, particularly where they were reliant on relationships and expertise based in the UK. This model involves an EEA-authorised entity (“EEA Hub”) setting up a UK-authorised branch (“UK Branch”). There is a technical legal argument that, as the UK Branch is the same legal person as the EU Hub, UK based employees would be able to draw on the authorisations of the EEA Hub to provide it with ongoing support in respect of its EEA business. 

Now that the “branch back” model has matured, we have started to see a number of trends develop, which are likely to continue into 2026:

• A number of firms have started to reassess the location of their EEA Hub. This may be driven by legal or regulatory changes in the home state jurisdiction (e.g, EIOPA pressure to more closely regulate known ‘hub’ entities), or by commercial shifts in the business.  
• Various entities have been embarking on Post-Brexit ‘tidying up’. Many in the sector had to act quickly to ensure that their post-Brexit solutions were implemented pre-IP Completion Day, resulting in instances of sub-optimal operational arrangements or convoluted group structures. This is particularly the case amongst acquisitive MGAs and brokers, who may have found themselves with multiple EEA Hubs and UK branches within the same corporate group.  Firms are reassessing Brexit solution implementation, reviewing market norms, and consolidating.
• New market entrants with aspirations to do pan-European (incl UK) business have increasingly been establishing only a branch in the UK, as opposed to fully incorporated subsidiaries. This contrasts with firms that were operational pre-Brexit, who now often have a UK authorised entity, as well as a EEA authorised entity with a UK branch.