London is unlikely to become a centre for housing insurance-linked securities (ILS), according to Grant Thornton.
Grant Thornton’s 2015 Insurance Hubs Report, based on discussions with company leaders across the sector, argued that London’s pre-eminence as an insurance and reinsurance centre has rarely been stronger, and in March, the UK government vowed to take the necessary steps to attract ILS business into the country.
As part of the 2015 budget, chancellor George Osborne said that the government would work with the industry and regulators to develop competitive corporate and tax structures to allow ILS to be domiciled in the UK.
Osborne also raised the government’s intentions to back financial technology and pursue the possibility of conducting global reinsurance.
But in the UK, special purpose vehicles (SPVs) and protected cell companies (PCCs)—two structures that are key components to an ILS marketplace—are not currently feasible. Primary legislation would be required to facilitate such a marketplace in the UK, according to Grant Thornton.
The UK’s tax environment is also seen by many as being too hostile for those looking to establish an ILS onshore in the UK, according to the report. Although corporate tax rates have fallen, and will continue to do so according to the most recent UK budget, the tax framework has a reputation for being one of the most complex in the world.
Some of the steps that will need to be considered will include ensuring that the proposed corporate vehicle tax is neutral, and that each cell of a PCC vehicle would be a separate taxable entity.
The UK’s regulatory speed of response has also been found wanting. The country is competing with well-established domiciles, particularly Bermuda, where the regulators are able to turn applications around in days, as well as being able to provide listings capabilities for the vehicles.
Another vital component of ILS is speed to market, and the UK regime is used to taking months, and in some cases a year, to authorise vehicles.
The report argued that it would be necessary to design a regulatory process that can set up a new insurance vehicle in a time scale that makes the UK competitive with other domiciles, without compromising the regulatory objectives of the country’s financial regulators.
