UK government launches consultation on cat bonds and ILS framework

The UK Treasury has launched a consultation document detailing guidelines and required regulatory framework necessary for a catastrophe bond and insurance-linked securities (ILS) market to be established in Britain later this year.

In recent times the British insurance industry has voiced concern over losing insurance and reinsurance market share to offshore domiciles such as Bermuda, which specialises and has a strong presence in the ILS and cat bond space.

And now, in a bid to retain, and win more business from other insurance, reinsurance and ILS hubs, the UK government has taken another step towards turning London into a global hub for ILS and catastrophe bonds, a growing segment of the global risk transfer landscape.

The ILS consultation document has been welcomed by the London Market Group (LMG), an organisation established to look at the London insurance and reinsurance sector, and that also has a task force that is focused on progressing initiatives to establish London as a global ILS hub.

“This is great progress in the first of LMG’s initiatives in creating an environment in which innovation can thrive in the London market. ILS has brought new capital and solutions to the market and we want London to be the centre for the future development of this business,” said Malcolm Newman, Chief Executive Officer (CEO) of SCOR’s Paris-London Hub, Chairman of the International Underwriting Association and sponsor of LMG’s ILS Working Group.

The new consultation document explores the growth of the ILS and cat bond sector in recent times, highlighting the benefits of bringing a wealth of such business to Britain’s shores.

Part of the documentation outlines the need to develop an ILS and catastrophe bond framework that is Solvency II equivalent, following the implementation of the new European insurance and reinsurance regulatory framework on January 1^st, 2016.

The UK government believes “that, with the right framework, London can make a major contribution to the continued growth and development of ILS business,” explains the consultation.

The purpose of the consultation is to provoke thinking on key features and elements that will be necessary in order to turn London into a successful hub for ILS and cat bonds, welcoming a response from insurers, reinsurers, ILS players, and investors that have an interest in the space.

The government notes that the views, ideas and opinions of all stakeholders relating to the issue should respond to the consultation by midnight 29^th April 2016, full details of how to respond can be found in the consultation document.

“The market has a wealth of experience to offer government to help develop the detail behind some of their proposals, for example their experiences of dealing with other regulatory regimes around the world which might guide the regulatory debate. The ILS taskforce will offer this expertise to the government to continue the strong partnership that has delivered to date,” said Newman.

Another section of the recently published consultation document explores the authorisation and supervision of insurance special purpose vehicles, highlighting the structural concerns, the range of perils that can be protected and features of ILS that can be utilised to develop a London ILS market.

Regarding taxation issues, the consultation notes that it will likely aim to match tax levels in other countries or domiciles, but is keen to establish rules to ensure it is not possible to abuse specific tax rules relating to ILS business.

“The consultation is a key element of the legislative development process that we hope will mean the new ILS framework becomes law by the end of 2016. This document covers the key issues that need to be resolved: regulation and authorisation, corporate law and finally taxation – and it gives a very clear basis for an industry response. LMG will be participating fully in this consultation and would encourage all interested parties to respond with their views.

“The government has listened to our requests and responded very proactively, it is now time for the insurance sector to play its part to help bring ILS business onshore to the London market,” concluded Newman.

The UK is playing catch-up not just to the established ILS and catastrophe bond domiciles of Bermuda, the Cayman Islands and Dublin, but also to Malta, Gibraltar, Guernsey and the Isle of Man, all of which have ILS and cat bond SPV legislation in place now.

Clearly London should be able to offer a home to the ILS and catastrophe bond market, to complement its status as a leading insurance and reinsurance market, but in order to really make an impact London and the UK need to think bigger and offer innovative new options for ILS and cat bond issuance and investment.

Also read:

– London LMG looks to innovate on equal reinsurance credit for ILS.

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

– 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.