The UK government has released its second consultation on the implementation of an insurance-linked securities (ILS) regime.
On 1 March, the government published its first consultation, which revealed its approach for an “effective and competitive” framework for insurance special purpose vehicles (IPSVs) in the UK. The government asked for feedback on the consultation, which closed in April this year.
The government received 21 responses from insurers and reinsurers, professional services, investment banks, industry groups and private individuals.
According to the second consultation, responses were “supportive of the government’s intention to create a competitive framework for ILS and were broadly supportive of the proposals set out to implement a competitive regulatory and tax regime for ILS”.
The consultation stated: “Responses agreed that a protected cell company corporate structure was appropriate for a new ILS framework; that a bespoke approach to the taxation of ISPVs would be needed; and stressed that a robust but streamlined supervision of ISPVs from the Prudential Regulation Authority and Financial Conduct Authority would be key to the success of the regime.”
Following the government’s initial consultation on ILS, the second consultation proposes to create a protected cell company (PCC) regime for multi-arrangement ISPVs.
The consultation said that multi-agreement ISPVs are permitted under Solvency II, however, the core requirements of the directive “will apply in respect of each individual contractual arrangement”.
It stated: “The proposed UK PCC regime is designed to meet these Solvency II requirements through a strict segregation of risk transfer contracts, therefore providing confidence to cedants and investors that deals will be robustly segregated. It will also provide an administratively efficient means for managing multiple deals from one ISPV.”
According to the government, PCCs introduced under the Risk Transformation Regulations will only be available for use as authorised mISPVs.
Some consultation responses argued that a protected cell regime would “add value” across a range of financial services activities. Respondents also suggested that PCCs should be available as a corporate structure for other regulated activities.
But the government said it will keep the potential broader use of PCCs “under review, but will not extend the purpose of PCCs at this stage”.
In terms of taxation, the government proposes to implement a bespoke tax regime.
This will involve exempting the insurance risk transformation of ISPVs from corporation tax, a complete withholding tax exemption for foreign investors, and UK investors being taxed as normal according to their facts and circumstances.
The government 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”.
The deadline for responses to the second consultation is 18 January 2017.
Malcolm Newman of the London Market Group, which worked extensively on the proposals, welcomed the second consultation, saying: “There will undoubtedly be debate and discussion over some issues but we look forward to a constructive dialogue with government and the regulators to refine the proposals so that ILS business can be conducted onshore in the UK in 2017.”
“Once we have the legislation in place, we can start the vital of work of attracting business. We want to use our strengths and our ability to innovate to create new products and grow the overall reinsurance and insurance market.”
Paul Traynor, international head of pensions and insurance segments at BNY Mellon, added: “We welcome the announcement that the UK Government is consulting on a new regulatory and tax framework for ILS."
"An onshore ILS centre in London would facilitate innovation, particularly in the development of risk transfer products such as pandemic and emerging market natural catastrophe risk. The ability to transfer emerging risks to the capital markets rests on the ability to understand, model and parameterise the peril. If a solution can be found, this will set a precedent for other emerging ILS risks.”
