Could South Africa’s cell captive model offer a blueprint for the UK?

Captive International  talks to Jared Lesar (pictured) of Root on how the UK can benefit from South Africa’s captive insurance regulations.

As momentum builds around the idea of reintroducing or modernising the captive insurance framework in the UK, a growing number of industry professionals are turning their attention to South Africa as a potential model for regulatory inspiration. With its nuanced and robust approach to cell captives – particularly third-party captives – South Africa stands out as one of the few jurisdictions where this concept has matured into a practical and regulated part of the insurance landscape.

Jared Lesar, head of legal at Root, offers a compelling view into why South Africa’s cell captive regime might hold the key to solving some of the UK market’s historical reluctance to embrace captives fully. “A cell captive is a structure where a non-insurer who wants to run an insurance business can do so without itself being licensed as an insurer,” he explains.

In South Africa, there’s a clear regulatory distinction between first-party captives, which operate similarly to the UK’s direct writing captives, and third-party captives, a distinct model. As Lesar puts it: “What a third-party captive allows one to do is not only underwrite and sell insurance within your own group of companies, but underwrite and sell insurance to third parties – most notably, your customer base or the public.”

This makes the structure particularly attractive to “affinity brands” such as retailers, telecoms companies and banks, who wish to distribute insurance products underwritten by a third-party insurer but still participate in the risk and reward without becoming a licensed insurer themselves.

More inclusive, regulated model

Crucially, these third-party captives do not operate in regulatory isolation. While not subject to the same licensing requirements as full insurers, they are still regulated as financial services providers under South African law. “Our equivalent of the UK’s Consumer Duty also applies to any sale or distribution of insurance products by those using third-party cell captives,” notes Lesar.      

This alignment with UK regulatory values might make the South African model more palatable to British regulators considering reforms. Indeed, Lesar underscores that the South African market is regulated in a way that mirrors its UK counterpart. “Our insurance law is rooted quite deeply in English law,” he says. “We also have a similar regulatory structure – the ‘twin peaks’ model – with one authority handling market conduct, akin to the FCA, and another managing prudential matters, similar to the PRA.”

Lessons for the UK

Lesar believes there are several lessons the UK could learn from South Africa’s approach. Notably, he points to the balanced regulation of both first-party and third-party captives. “What South Africa can offer the UK is an illustration of how one can set up a quite balanced approach to regulation – giving participants the opportunity to innovate with product design while still protecting consumers.”

The UK’s current regulatory environment, by contrast, might be too onerous for captive structures to thrive domestically. “In the past, there’s been this perception that the UK is not a particularly attractive jurisdiction for captives because the same regulatory requirements – licensing, governance, capital – apply whether you're using a cell captive structure or establishing a licensed insurer,” Lesar notes. “As a result, many have looked offshore to places like Guernsey or Jersey.”

However, if the UK were to adopt elements of the South African model – particularly in embracing third-party captives – it might foster a more innovative and inclusive insurance landscape.

Role of technology in making it work

Beyond regulatory considerations, Lesar also highlights the importance of a digital-first approach, particularly in value chains with distributed responsibilities – much like the third-party captive model.

“In a typical value chain, you have one party underwriting, another distributing, perhaps others administering claims or policies. Each may use different systems – some digital, some legacy – and those systems often don’t communicate well,” he says.

To solve for these inefficiencies, Root has embraced robust APIs (Application Programming Interfaces), which Lesar compares to a librarian ferrying books between two libraries. “APIs allow systems to push and pull data between each other. This is essential in a distributed model, where automation of processes like reporting, compliance, and claims management can produce significant efficiencies.”

This approach not only reduces costs and administrative burden but also enhances regulatory oversight by ensuring that data is digital, auditable and readily accessible. Lesar points to Root’s collaboration with South African captive insurer Guardrisk as an example: “Where we’ve been able to provide digital solutions with APIs, something like reporting becomes seamless – data flows automatically across the value chain.”

Model for modernisation?

Given the UK’s complex regulatory legacy and its role as a global insurance hub, reforming its approach to captives – particularly third-party models – won’t be simple. But as Lesar points out, “There are lessons to be learned from how South Africa regulates both first-party and third-party captives. At the very least, it would be helpful for anyone involved in designing a UK captive regime to consider how we’re doing things in South Africa.”

With potential announcements on the horizon and increasing dialogue around modernising the UK’s captive offerings, South Africa’s cell captive model could serve as both a blueprint and a catalyst for change.

As Lesar concludes, “It’s a model that shows you can enable innovation, broaden access, and maintain robust consumer protections – all at the same time.”

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