UK ILS rules published, aim to keep UK reinsurance competitive

by Artemis on July 20, 2017

The UK government has published its finalised regulations that it says “introduce a competitive regulatory and tax regime” for insurance-linked securities (ILS) business and will help to ensure that the country remains “at the forefront of the global reinsurance market.”

UK flagThe awaited rules which had been delayed by the calling of a snap election by Prime Minister Theresa May are designed to help the UK gain a share of what it sees as a rapidly growing ILS market.

The Risk Transformation Regulations 2017, which you can find the final version of and a response to the associated consultation period over on the UK government website, describe how to set up special purpose vehicles for insurance-linked securities (ILS) issuance, a legal framework for ILS, and the associated tax treatment of such instruments.

The UK ILS regulations also “provide for a tailored and proportionate approach to authorisation and supervision,” the government said today.

The publication of the regulations will give the insurance and reinsurance industry certainty in how the new ILS regime will work, so that they can be ready for when the rules come into force this Autumn, the announcement states.

Economic Secretary to the Treasury, Stephen Barclay, commented on the announcement; “This new bespoke regime for Insurance Linked Securities will ensure the UK remains the most competitive insurance and reinsurance hub in the world.

“This global business is evolving rapidly and we are determined to make sure we’re part of this evolution.”

Malcolm Newman, Chairman of the London Market Group’s ILS Taskforce which has been instrumental in getting these regulations ready for implementation, added; “The new ILS framework offers a very exciting future for the London Market to continue to deliver innovative new products that make a real difference. I am proud that the LMG has helped lead the development of these proposals.

“We believe there is a real appetite in the London Market to invest in ILS products which will bring investors to the UK and make a significant contribution to growing the UK’s trade.”

The regulations will certainly level the playing field, in terms of what ILS business can be done in London compared to the other established ILS regulatory domiciles. How much new business they will actually bring to the UK market remains to be seen, with the speed of approval and cost (both frictional and in real terms) both likely to be key factors for sponsors and investors.

But their finalisation and the fact the regulations now exist is extremely positive, both for the UK and for the ILS market as a whole. The effort undertaken to get the regulations to this stage has been considerable, with a lot of input from highly experienced parties which should ensure a polished end-product.

The government said that the new ILS regulations and The Risk Transformation Regulations 2017 bill will be laid before the UK Parliament after its summer recess and so will be in force and ready for use in the Autumn this year.

That will make the January 2017 reinsurance renewals a key test for the regulations as it will be hoped that an ILS transaction can be completed in the UK during that key period for the London insurance and reinsurance market.

It’s a positive step for the global reinsurance and ILS market, as it offers greater choice for sponsors and investors, a chance for London’s re/insurance expertise to be put to work to channel risk to the capital markets, and global players as well as existing ILS domiciles a chance to collaborate to further innovate in ILS and reinsurance and grow the overall market for everyone’s benefit.

Collaboration is key, as there is significant expertise in the UK and the other ILS or re/insurance markets that together could help to create better, more efficient insurance risk transfer products that begin to mobilise the true depth of capital that is attracted to insurance-linked returns, for the benefit of everyone around the globe.

A UK domiciled catastrophe bond or collateralised reinsurance transaction involving a new sponsor, assisted by global service providers and leveraging the best of global ILS expertise, would be an extremely positive event for the market as a whole and demonstrate how the UK can help to grow the ILS pie.

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