Connecting Capital and Insurance Risk: Lloyd’s and the UK’s Evolving Insurance Landscape

The UK insurance market is broadening the ways in which capital can be deployed against insurance risk. While traditionally understood as a specialist insurance and reinsurance marketplace funded through its member-backed syndicates, Lloyd’s is increasingly part of that development, providing routes for institutional and alternative capital to support underwriting.

At the same time, the UK regulatory framework is evolving to facilitate alternative forms of insurance risk transfer, including insurance-linked securities (ILS) and other risk-transformation structures.

These developments bring Lloyd’s, institutional capital and the capital markets into closer alignment, creating new opportunities for insurers and investors while raising important questions around capital structures, risk transfer and regulation.

From members’ capital to a broader capital ecosystem

The traditional Lloyd’s model remains centered on members (which may include individual “Names”) providing capital to support underwriting, but the composition of that capital is becoming more diverse.

At 31 December 2025, Funds at Lloyd’s totalled £31.132 billion. Institutional investors accounted for £3.909 billion. Lloyd’s also reported that institutional investors provided £400 million of the increase in Funds at Lloyd’s during 2025 through the London Bridge 2 platform, taking total investment through London Bridge to $2.9 billion. 

The significance of these figures is not simply the additional capital they represent. They illustrate a shift in how capital can reach the Lloyd’s market. Institutional investors can participate in insurance risk without entering the market through the traditional member or syndicate model, creating a broader capital base to support underwriting.

But this raises a more fundamental question for Lloyd’s: how can its market infrastructure accommodate different forms of capital and connect them efficiently with insurance risk? London Bridge 2 provides one answer.

London Bridge 2: connecting institutional capital with Lloyd’s

London Bridge 2 PCC Limited (LB2) is a protected cell company incorporated in England under the Risk Transformation Regulations 2017 and authorised and supervised by the PRA and FCA as a multi-arrangement insurance special purpose vehicle (ISPV). 

Lloyd’s describes it as a structure through which (re)insurance risk underwritten at Lloyd’s can be transformed into investable debt or equity securities for institutional investors.

Approved by the PRA and FCA in 2022, LB2 provides a route for institutional capital to access Lloyd’s underwriting without requiring investors to establish a new syndicate or become Lloyd’s corporate members themselves. Instead, Lloyd’s business can be reinsured through a segregated cell of LB2 with securities in the cell issued to investors to provide the capital supporting that risk.

This makes LB2 more than simply an ILS transaction taking place alongside Lloyd’s. It demonstrates how Lloyd’s can use the UK’s risk-transformation framework to connect its underwriting with institutional capital and capital-markets funding.

The model also illustrates the respective roles of the participants. Lloyd’s provides access to an established pool of insurance and reinsurance risks and underwriting expertise; the risk-transformation vehicle provides the legal and regulatory structure; and institutional investors provide capital against defined insurance exposures. That separation allows capital markets investors to participate in Lloyd’s underwriting without becoming part of the traditional Lloyd’s capital structure or requiring additional regulatory authorisations.

Where does ILS fit in?

London Bridge 2 sits within a broader market for ILS, which provides a mechanism for transferring insurance risk to capital-markets investors.

In a typical ILS transaction, an insurer or reinsurer transfers defined risks to an authorised special purpose vehicle. The vehicle is funded by investors, often through the issuance of securities, and uses that capital to meet its obligations if the relevant insured events occur. The result is that insurance risk can be financed by capital markets investors rather than relying solely on traditional reinsurance capacity.

The UK has provided a statutory framework for this type of risk transformation since the Risk Transformation Regulations 2017. The framework provides for the authorisation and supervision of transformer vehicles and supports structures, including protected cell companies, through which insurance risk can be transformed into investable instruments.

LB2 is therefore one specialised and significant application of the wider UK ISPV regime: the underlying risk originates in Lloyd’s, but the capital supporting that risk can ultimately come from institutional investors through the capital markets. ILS transactions outside Lloyd’s use the same broad risk-transformation concept but may involve different counterparties, structures and commercial objectives.

The distinction matters because Lloyd’s, LB2 and ILS operate at different levels. Lloyd’s is the insurance marketplace; LB2 is a particular regulated structure through which Lloyd’s risks can be transferred and funded; and ILS describes the broader category of capital-markets solutions used to finance insurance risk.

The significance of the UK reforms discussed below is therefore that they are gradually developing the infrastructure around that connection, making it easier to structure, fund and execute insurance risk-transformation transactions.

The UK ISPV regime is evolving

In July 2025, the PRA published PS9/25, its final policy on reforms to the UK ISPV regulatory framework. The PRA stated that the reforms were intended to enable the UK to play a bigger role in the global ILS market, while maintaining appropriate prudential standards.

Among the changes proposed was an accelerated authorisation pathway for certain UK ISPV applications which meet specified criteria, including some catastrophe bond transactions. Under that pathway, the PRA, working with the FCA, will consider applications and, where satisfied, issue approvals within 10 working days of a complete application being submitted.

The reforms also introduced greater flexibility around the operation of multi-arrangement ISPVs. In particular, the PRA removed the requirement for a UK multi-arrangement ISPV to be structured as a protected cell company where it assumes risks under more than one separate risk transformation transaction and those transactions constitute a single contractual arrangement. The reforms also addressed the treatment of investment returns, grace periods for certain funding requirements and limited recourse clauses.

These changes demonstrate that the UK ISPV framework is moving beyond the relatively narrow model contemplated when the regime was introduced in 2017 towards one that should provide greater opportunities for investment in the insurance market. The objective is increasingly to provide a flexible legal and regulatory infrastructure through which different forms of insurance risk can be financed.

Further reform: funding, permissions and PCC structures

In April 2026, HM Treasury published its response to its consultation on changes to the Risk Transformation Regulations, confirming that it intends to proceed with a number of reforms designed to give transformer vehicles greater flexibility in how they are funded and authorised.

One of the proposed changes concerns the requirement for financing proceeds to be fully paid in upfront. The Government intends to use primary legislation to clarify the applicable funding requirements and give the PRA greater discretion over the mechanisms that transformer vehicles can use to meet them, while retaining the underlying requirement that a transformer vehicle has sufficient assets to meet its maximum liabilities.

The Government also intends to give the PRA greater discretion over the scope of a transformer vehicle’s permissions. Under the proposed changes, the PRA would no longer be required to impose limitations on a vehicle’s permissions in every case, allowing it instead to determine whether such limitations are appropriate in the circumstances of the particular vehicle and transaction.

Taken together, the proposed changes should provide greater flexibility in structuring and funding risk-transformation transactions, while retaining the prudential safeguards at the heart of the regime.

A further potentially important development concerns protected cell companies. The Government has decided to proceed with legislation that would allow cells of PCCs used for risk transformation to enter into multiple contracts with multiple cedants. This is intended to facilitate more sophisticated structures and reduce some of the constraints associated with the existing single-contract model.

This could be particularly relevant to sponsors seeking to use a single PCC structure across a number of transactions or cedants, although the precise effect will depend on the legislation and regulatory rules ultimately brought into force.

These changes will not take effect immediately. The April 2026 response makes clear that a combination of primary and secondary legislation will be required, with the primary legislation to be introduced as Parliamentary time allows. The reform programme therefore represents a direction of travel rather than a set of changes that can all be relied upon by market participants today.

There are also clear limits to that direction of travel. The 2025 consultation proposed allowing transformer vehicles to assume risk directly from non-insurers, potentially widening the range of parties able to use the risk-transformation framework. Following consultation, however, the Government decided not to proceed with legislation on this point at this stage, concluding that further work was required on the appropriate safeguards and the interaction with other regulated activities. The proposal remains under consideration with the PRA and FCA.

For insurers, investors and their advisers, the overall picture is therefore one of incremental reform rather than wholesale deregulation. The Government is seeking to make the UK risk-transformation framework more flexible, particularly in relation to funding, authorisation and the use of PCC structures, while retaining regulatory boundaries around the risks that can be transferred and the entities that can participate in the regime.

The emerging UK captive regime

A related, but distinct, development providing a measure of innovation in insurance is the UK’s proposed captive insurance regime.

In July 2026, the PRA and FCA published proposals for a tailored UK captive insurance regime. The initial regime is aimed at single-parent captives and is intended to provide proportionately lower capital and reporting requirements, a more flexible capital resources framework and a faster authorisation process. The consultation is currently open until 14 October 2026, with implementation expected in mid-2027.

PCCs are intended to form a later stage of the regime. HM Treasury has confirmed that it intends to legislate to allow PCCs to effect and carry out insurance contracts, creating a separate category of insurance PCC alongside existing risk-transformation PCCs. However, the legislation required to achieve this will not be in place for the launch of the captive regime in 2027. The Government has also decided not to legislate at this stage to allow a single PCC to undertake both risk transformation and insurance activities.

The captive reforms are therefore relevant to the broader development of alternative risk transfer in the UK, but they should not be conflated with the ILS regime. The different structures serve different purposes:

• ISPVs and risk transformation provide a mechanism for transferring insurance risk to capital markets investors.
• Captives allow businesses to insure or reinsure their own risks.
• PCCs provide a means for segregating different pools of assets and liabilities, although their permitted uses depend on the relevant regulatory regime.

The UK is therefore developing all three areas, but on different regulatory and legislative tracks. Together, they are expanding the range of options through which insurance risk can be retained, transferred and funded.

What does this mean for insurers?

For insurers, the practical significance is that alternative capital has established itself as another component of the wider risk-transfer toolkit, rather than a standalone alternative to traditional reinsurance.

The most appropriate structure will depend on the nature of the risk and the commercial objective but new techniques are capable of providing options for insurers whether they are seeking additional underwriting capacity, transferring a defined exposure, accessing longer-term capital, diversifying its sources of reinsurance protection, or some combination of these.

That means the relevant questions are likely to include:

• whether the objective is additional underwriting capacity, risk transfer, or both;
• whether a Lloyd’s structure, conventional reinsurance or an ILS transaction best fits the risk;
• what form of investor participation is required;
• how collateral and funding should be structured;
• what regulatory approvals are required;
• how investor rights should be balanced against underwriting discretion;
• what happens following a loss or other trigger event; and
• how the structure interacts with existing reinsurance arrangements.

The answers can cut across several areas of legal and regulatory advice, including insurance regulation, capital and solvency requirements, corporate structuring, collateral arrangements, securities and investment regulation, and the allocation of rights and obligations between insurers, investors and other counterparties.

Conclusion

The UK insurance market is developing a broader infrastructure for connecting insurance risk with different sources of capital. Lloyd’s is increasingly part of that infrastructure, while reforms to the UK’s ILS, risk-transformation and captive regimes are expanding the structures through which risk can be retained, transferred and funded.

For insurers and investors the resulting landscape is less about choosing between traditional insurance capital and the capital markets and more about determining which structure best fits the risk, capital and commercial objectives in question.

For further information on any of the topics raised please contact the authors or your usual Freshfields contact.