The UK has opened a consultation on a new regulatory framework for insurance-linked securities (ILS) business.
The document, issued on 1 March, outlines the benefits that an ILS business would bring to the UK, as well what the possible framework would look like once implemented.
Chancellor George Osborne confirmed in 2015 that the government would begin working with the insurance industry and regulators to develop competitive tax and corporate structures to allow ILS deals to be conducted in the UK.
Property and casualty cat bond issuances totalled $5.91 billion last year, with outstanding risk capital reaching $22.64 billion, according to GC Securities.
According to the consultation document, London could be well-placed to carve out a significant slice of the ILS pie: “The government believes that, with the right framework, London can make a major contribution to the continued growth and development of ILS business.”
“London is the largest global hub for commercial and speciality insurance risks and can offer a cluster of specialist insurance and capital market expertise that is unmatched in the global market. By supporting innovation within a trusted and robust regulatory framework, London should be well placed to become a leading market for alternative risk transfer.”
Any proposed framework would need to meet the “overarching” requirements of the Solvency II Directive, which took effect on 1 January and “recognises ILS cover provided by special purpose vehicles (SPVs) as a risk mitigation technique available to insurance and reinsurance firms”.
“[The Solvency II SPV framework] is designed to ensure the prudent authorisation and supervision of SPVs used for insurance purposes and we believe that this framework can be applied in a way which meets the needs of market participants and delivers a trusted framework within which the market can operate.”
A Grant Thornton report pointed out in November 2015 that the UK would also need to introduce protected cell companies (PCCs) in the same vein as key ILS domiciles.
“We understand that it has become standard market practice to use a bespoke form of corporate
entity. This type of entity is most commonly called a ‘PCC’, but other names are used, such as an ‘umbrella company’ and a ‘segregated account company’,” explained the consultation document.
“The UK therefore proposes to amend companies and insolvency law in the UK to allow for the creation of PCCs. Use of PCCs will be limited to ILS deals and will be optional for market participants. In other words, multi-arrangement ISPVs may use PCCs but are not required to.”
The consultation will run until 29 April, with a view to draft regulations for a new ILS framework being drawn up later this year.
