London needs to demonstrate that it can compete with the likes of Bermuda in tax and regulation if it is going to become a hub for insurance-linked securities (ILS), according to a new Willis Capital Markets Advisory (WCMA) report.
The report asked industry professionals what they thought the key regulatory and tax requirements are for a successful ILS framework. Bermuda was cited as the prime example of how to do it properly.
Julian Enoizi, CEO at Pool Re, commented in the report: “Bermuda not only [possesses] the necessary infrastructure and knowledge that supported the reinsurance and ILS market, but also offered attractive tax advantages.”
Bermuda already claims a significant share of the ILS market. Last year, the Bermuda Stock Exchange reported record ILS listings, with more than 60 listings worth $6.16 billion.
In total, the number of ILS listed vehicles on the BSX increased from 151 to 175, a 16 percent increase.
But to the UK’s credit, the country is striving to create a framework that will make it competitive.
At a recent City & Financial Global conference on ILS in London, Nick Gardner, partner at Ashurst, explained that the UK government’s focus on tax is to create a level playing field for insurance special purpose vehicles established in the UK. Without this, the tax cost of moving onshore alone would be prohibitive.
The government most recently said its aim is to “create a regime that is internationally competitive and in line with the UK’s move towards a territorial tax system”.
In the WCMA report Katherine Coates, partner at Clifford Chance, commented: “Once in place the new regulations will mean that the UK becomes the first onshore centre with suitable ILS regulations, and this, together with the strength and the expertise of the London insurance market, should enable the rapid development of an ILS market in London.”
WCMA also questioned industry professionals about Solvency II compliance.
According to Coates, if the requirements, as interpreted by the Prudential Regulation Authority, are either “unclear or too onerous”, then the UK will not be as attractive as other Solvency II-compliant markets, such as Gibraltar or Malta.
At the same time, Coates questioned whether London would be able to compete with non-Solvency II equivalent locations such as Bermuda or Guernsey.
She said: “The key areas for further discussion with [regulators] are the interpretation of the fully funded requirement and the timing of the application processes for initial authorisation and for approval of individual cells.”
Luca Albertini, CEO and Leadenhall Capital Partners, suggested that one of the key issues will be educating regulators on how to apply Solvency II to the very specific matters of ILS transactions.
Albertini said: “We have seen a couple of features in the proposed regulation which look more restrictive than what is required in another Solvency II compliant jurisdiction and in other Solvency II equivalent jurisdictions, and we are working with the regulator to explain why such features are not only not necessary but would also create a very unfavourable regime in London.”
