Attracting ILS & cat bonds will be challenging for London: Report

by Artemis on October 14, 2015

A report published by global accounting firm Grant Thornton in partnership with UK Trade & Investment (UKTI) concludes that London and the UK will find attracting insurance-linked securities (ILS) business tough to achieve despite best efforts.

The report finds that while London remains a pre-eminent insurance and reinsurance hub, its efforts in recent months to attract ILS, catastrophe bond and collateralised reinsurance business may not prove successful.

The report notes that “In order to better maximise the opportunities provided by the influx of alternative capital into the market, the government has stated its commitment to work with the industry and regulators to develop a new competitive corporate and tax structure for allowing Insurance Linked Securities to be domiciled in the UK.”

Citing the UK Government Treasury’s stated goal of developing “a new competitive corporate and tax structure for allowing Insurance Linked Securities to be domiciled in the UK” the report suggests that this will require significant effort and could even prove out of reach.

There are “considerable hurdles” to be overcome in order for the UK and London to establish itself as a viable hub for alternative capital and insurance-linked securities (ILS) such as catastrophe bonds. Broadly, these hurdles can be categorised as company law, taxation and regulation.

The report notes that, in a survey on this topic, the above were the key issues cited when it comes to selecting a domicile for ILS business, while the approval process and regulation were cited as quite or very important.

New legislation would be required to establish special purpose insurance vehicles as a corporate structure and to allow for protected cell companies (PCC’s) the report notes. However this has been achieved in many other domiciles so it seems unlikely to hinder the UK’s progress into ILS, in our opinion.

The tax environment is seen by many as being “too hostile for those looking to establish an ILS onshore in the UK” the report states. It notes that the UK tax framework is among the most complex in the world and that ensuring that any SPV or PCC structures that are created remain tax neutral, while PCC cells remain separate taxable entities, could be a challenge.

Recently Steve Hearn of the London Market Group stated that it would seek to make taxation based on withdrawal of profits and capital, rather than the vehicles themselves attracting any taxation. But the report suggests that this may be a significant challenge to achieve.

Other tax options being discussed include:

  • Timing of tax payment – this might well be at the wind-up of the vehicle and not on an annual basis, thus helping cashflow .
  • Taxing the investor not the vehicle – if both the investor and the risk is overseas, then in theory there would be no tax to pay in the UK.
  • Rollover relief – a possible postponement of capital gain tax if all the funds are being reinvested into another vehicle.

Another key issue here is speed, something that other domiciles have made a key benefit of doing business there, such as Bermuda with its rapid approval process for new SPI’s and catastrophe bond vehicles.

“The UK regime is used to taking months, and in some cases a year, to authorise vehicles,” the report explains, but if London is to successfully attract ILS it needs to have a regulatory environment that can set up a new vehicle as quickly as any competing location.

While the UK and London have many of the building blocks necessary for bringing ILS and other collateralised reinsurance structures to the market, the competition is going to be tough and the hurdles difficult to overcome, the report suggests.

“Establishing differentiation will be crucial,” the report continues, a key point as simply bringing the same ILS business models to London and going up in direct competition with domiciles established in the space is perhaps a zero-sum game, we would suggest.

The report suggests that attracting the managers rather than the structures may be more important than where the deals are domiciled and actually better for the UK Government’s revenue ambitions. This is true and perhaps suggests a reason for the LMG’s stated focus on collateralised reinsurance rather than catastrophe bonds, as making London an attractive place to do that business could encourage the capital to come to the city as well.

The report concludes; “Challenging the status quo will not be easy – or given the complexity of the framework required – quick.”

We feel it’s important to note that creating a regime that can support ILS and cat bonds is an important attribute for any global insurance and reinsurance or financial centre, as we wrote earlier on Sweden’s ambitions here, so striving to put the regulatory environment in place is no bad thing.

However, we do agree with the report that London’s task will not be easy, to create an environment that is truly competitive and attractive in terms of speed to market, cost, tax and regulation, will not be easy.

Also read:

London ILS work about innovation & leveling the playing field: Hearn.

London re/insurance market needs true innovation: DAC Beachcroft.

Collateralised reinsurance focus for London (LMG) ILS task force.

London has to fight its corner on ILS: Michael Wade, Cabinet Office.

London ILS task force participants revealed, holds first meeting.

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