London’s new insurance-linked securities (ILS) framework can make the city the global hub for innovative ILS solutions, but only if the UK regulator adopts a proportionate and responsive approach appropriate to the nature, scale and complexity of the risks assumed, according to Des Potter, head of GC Securities for Europe, the Middle East and Africa at Guy Carpenter.
Potter, who also sits on the London ILS Task Force board, suggested that the UK’s success has to be based on innovation.
He explained: “The goal is not to stem the flow of business going to Bermuda or to grow London’s market share of cat bonds, but to take ILS to its next stage of evolution using the unique skillset we have in London.”
The London Market Group’s London Matters report highlighted that, although reinsurance is the largest class of business underwritten in London, it continues to lose global market share, falling from 15 percent in 2010 to 12.3 percent last year.
Potter warned the industry: “London’s ILS framework will be vital in enhancing the city’s standing in the global reinsurance market. The big challenge is whether the UK regulator can provide the speed and certainty required to enable the UK to compete effectively with other ILS jurisdictions. The UK has a strong global reputation, but as the ILS market evolves, the regulator will need to be far more responsive than it is today.”
He suggested that after the next major property catastrophe loss event reinsurers will almost certainly turn to the ILS market for recapitalisation, however, right now, London’s infrastructure is not efficient enough to allow capital to be deployed quickly or cost effectively.
Legislation for the ILS framework is currently awaiting approval in the UK Parliament and is expected to come into force by late October.
The regulations will allow the setup of insurance special purpose vehicles and protected cell companies with exemption from corporation tax on insurance risk transformation profits, and a complete withholding tax exemption for non-UK investors.
Potter said: “These enhancements are going to put London in a better position. I do believe London’s ILS market will gain traction. The regulator will face a learning curve initially, but over a five-year horizon I really believe that, with its access to both insurance talent and financial markets capital, London can offer a market-leading alternative for risk transfer to the capital markets.”