UK government approves ILS regulations

A UK government cross-party committee has approved the Risk Transformation Regulations 2017 and the Risk Transformation (Tax) Regulation 2017, which are aimed at establishing London as a hub for insurance-linked securities.

The regulations introduce a regulatory and tax framework for ILS business in the UK, which would enable re/insurers to transfer risk to the capital markets.

Stephen Barclay, Conservative MP and economic secretary to the Treasury, noted that despite London’s status as global insurance hub, the rapid growth of the ILS market has taken place offshore.

“2017 has seen record issuance of insurance-linked securities with more than $11 billion-worth in this year alone. It is, therefore, the right time for the UK to improve its offer in this market. The regulations have been welcomed by the industry and by the London Market Group, which represents London’s insurers and reinsurers. I commend the regulations to the Committee,” said Barclay.

He noted that the regulations are comprised of four main elements.

First, they provide for UK regulators to apply a new authorisation and supervisory regime for the vehicles that issue insurance-linked securities in the UK. Secondly, the regulations introduce a protected cell companies to enable multiple deals to be managed in a single company. Thirdly, the regulations set out the rules for the issuance of securities by protected cell companies, aimed at protecting the interests of protection buyers and investors. Finally, the tax regulations set out an appropriate and straightforward tax treatment for the transformer vehicles that issue these securities.

Jonathan Reynolds, Labour Co-operative MP and shadow economic secretary to the treasury, said to bear in mind the potential risk around the securities market, with ILS being “particularly affected” during the global financial crisis and the collapse of collateralised debt obligations.

Reynolds raised questions around the regulations in terms of Brexit, and how the London market can compete globally.

“We have already seen reports that Lloyd’s has picked Brussels as the location for its new EU subsidiary, given its concerns about retaining access to the single market,” said Reynolds. “The success of the UK insurance market is inextricably linked to cross-border market access and so the sector is perhaps more dependent than any other on the need for sound transitional arrangements. The ongoing validity of insurance contracts across borders is vital to the economy, but we have no insight as yet on the Government’s proposals for mutual recognition.”

However, Barclay suggested that Brexit reinforces the benefit of increasing the UK’s influence over this part of the market.

Barclay added: With Brexit, this is the kind of global business that the UK should be competing in. EU insurers already use these vehicles and deals outside the EU. We are discussing a business that is conducted outside the UK from which the UK has the potential to benefit, as opposed to a business that is currently conducted in Europe.”

William Hogarth, legal director and senior associate at Clyde and Co, welcomed the new regulations, saying it was “a great step forward”.

He explained: “London is in a strong position when it comes to attracting ILS business as it is home to some of the world’s best and brightest insurance talent, whose knowledge, experience and ability to innovate is unparalleled. London also has a thriving community of brokers too and can draw on a huge amount of capital.

“ILS investors used to operating in jurisdictions such as Bermuda will need to get to grips with what London has to offer. A key sticking point is likely to be the speed-to-market facilitated by the efficiency of regulatory approvals; if London can genuinely compete with the established ILS markets in this space then the sky is the limit for the UK to become a hub for ILS business".

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