UK government advisor Michael Wade opened the recent City & Financial Global’s conference on insurance-linked securities (ILS) in London by calling the introduction of a bespoke regime for the popular financial instruments a potential “game changer” for the country.
The government released its second consultation on the implementation of an ILS regime in November, suggesting that its framework could be in place by next year.
Simon Kirby, economic secretary at the Treasury, the keynote speaker at the conference, told attendees that London “has an edge” compared to its competitors in this market.
Kirby said: “We know how important this industry is, we want to support you, and we’re taking through these measures on ILS to help you stay ahead of the game. And my door at the Treasury will always be open to your ideas and what else we can do to make this market vibrant, dynamic, and successful.”
“One thing we can be certain of is our insurance sector will keep its edge and position as one of the world’s very best.”
During one the panel sessions, Christopher Beazley, CEO of the London Market Group (LMG), explained the next steps: “With the clock now ticking on the proposed implementation of a UK onshore ILS framework in the spring of 2017, it is a timely opportunity to discuss the benefits and potential issues relating to the government’s proposals, to help educate the market so we are ready to hit the ground running next spring.”
LMG highlighted the need to reinvigorate the London market’s reputation for innovation in a report in 2014. Beazley said: “One of the reasons for this loss of creative impetus was that the business environment created by the UK’s government and the regulators was not providing the appropriate environment for innovation.”
After the report was published, LMG set up a special taskforce, headed by Malcolm Newman, CEO of the SCOR Paris-London hub and chair of the International Underwriting Association. The taskforce is made up of industry experts to work closely with the Treasury and other government agencies to “identify required changes to the UK’s regulations, company law and tax needed to enable London to participate in the burgeoning ILS market”.
The LMG taskforce will play an active role in the implementation process and “once the consultation period is complete we anticipate that the framework will be implemented in Q1 2017”.
Beazley reminded attendees that the taskforce’s mission is not is not to take business away from other ILS jurisdictions, but “to allow the industry more choice and find out where the growth opportunities in this market are, such as terrorism and flood risk”.
With the “reputation for innovation” in London, the city should be “the place where new solutions for client demands are created and nurtured”.
Beazley said: “The government’s proposed ILS framework, when implemented, will help to offer a level playing field with other markets already offering ILS vehicles, and by enabling the London market to compete in this new, dynamic market, we can start to develop innovative solutions that help to drive London’s growth agenda and demonstrate our ability to innovate for our clients.”
“This is particularly important with Brexit looming—it clearly demonstrates that London is proactively attracting capital as we anticipate a continuation of the recent growth seen in the global ILS market.”
The conference also hosted a tax panel, with Nick Gardner, partner at Ashurst, discussing tax treatment around the implementation of ILS in the UK.
In terms of taxation, the government has proposed implementing a bespoke tax regime for ILS.
This will involve introducing a new corporation tax exemption for the insurance risk transformation of insurance special purpose vehicles (IPSVs) and an interest withholding tax exemption for investors.
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”.
ISPVs are commonly located in offshore jurisdictions such as Bermuda and the Cayman Islands, which are low tax environments. Gardner explained that the government’s focus on tax is to create a level playing field for ISPVs established in the UK. Without this, the tax cost of moving onshore alone would be prohibitive.
Gardner noted that the government has also sought to ensure that the regime is consistent with the UK’s broader approach to taxing funds and investment vehicles. He added that tax exemptions are considered by the government as running the risk of “opening up abuse and avoidance”. As a result, the UK has included certain anti-avoidance rules in its proposal.
As one speak summarised: “If London doesn’t become an ILS jurisdiction, it is likely to be somewhere in Asia will take the opportunity. For London, it will be a massive missed opportunity.”
The deadline for responses to the second consultation is 18 January 2017.