UK insurance linked securities regime on course for September as regulations published

The regulations will be laid before parliament after its summer recess. They set out how to establish the new insurance special purpose vehicles (ISPVs) which will be used to issue ILS; the legal framework for ILS and the associated tax treatment; as well as providing for a “tailored and proportionate” approach to authorisation and supervision.

Stephen Barclay, economic secretary to the Treasury, said that early publication of the regulations would enable the industry to “be on the front foot” ahead of the new rules coming into force.

“This new bespoke regime for insurance linked securities will ensure the UK remains the most competitive insurance and reinsurance hub in the world,” he said. “This global business is evolving rapidly and we are determined to make sure we’re part of this evolution.”

ILS, which are sometimes known as ‘catastrophe bonds’, offer insurers an alternative to traditional reinsurance as a form of risk mitigation. An ILS arrangement enables an insurer to transfer large and complex risks, such as catastrophic risks arising from natural disasters, to the capital markets rather than a reinsurer.

The use, and value, of ILS is growing rapidly, with over $80 billion worth of the instruments issued globally to date. The market could be worth as much as $87bn by 2019, according to research cited by the Treasury.

The UK government first announced its intention to develop a competitive corporate, tax and regulatory framework for ILS vehicles as part of the 2015 Budget, and began consulting on its draft proposals for an ISPV regime overseen by the Prudential Regulation Authority (PRA) in November 2016. The final version of the regulations differs slightly from the original proposals, in that those carrying out the new regulated activity of insurance risk transformation would no longer have to pre-notify the PRA each time they create a new ‘cell’ as part of a multi-arrangement ISPV (MISPV).

Once the regulations are in force, providers would be able to carry out insurance risk transformation activity through a type of ‘protected cell company’ (PCC) corporate structure, making it administratively efficient to manage multiple deals through a single ISPV. The PCCs would be private companies limited by shares, but would be registered with the Financial Conduct Authority (FCA) rather than Companies House.

Feedback to the Treasury’s consultation exercise identified “some potential difficulties with the pre-transaction notification proposal”, according to the PRA.

“Since the November consultation, further work has been undertaken by HM Treasury and the PRA to explore alternatives to the proposed approach, while ensuring that Solvency II requirements continue to be met,” the PRA said in a statement.

“Under the new approach set out by HM Treasury in the response and updated regulations, the PRA would authorise the MISPV’s scope of activities, including the parameters within which future cells may be established, and the scope of the firm’s permission will be limited on this basis. Provided that a new proposed cell is in line with the activities agreed with the PRA, a post-transaction notification process will be adopted, whereby the PRA is notified within five working days of the vehicle assuming a new risk,” it said.

Further details of the approval regime will be set out in the PRA’s response to its own consultation paper, which is expected shortly.