Speed-to-market remains the main sticking point for the United Kingdom’s Risk Transformation Regulations 2017 and the Risk Transformation (Tax) Regulations 2017, which constitute the UK’s insurance-linked securities (ILS) regulatory regime, according to law firm Clyde & Co.
The issue of speed of approval remains the one which could hold back the UK’s potential as an ILS issuance hub, as market practitioners question whether regulators can respond to and approve applications for new UK domiciled ILS vehicles quickly enough.
William Hogarth, a legal director at Clyde & Co., commented on the UK ILS regulations passing a key Parliamentary committee yesterday, “”The news that the regulations have been approved is a great step forward. 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.”
However, he cautioned that the speed of approval could hinder uptake, but said that if this could be overcome it could open the doors for a much greater volume of ILS business to be transacted in London.
“A key sticking point is likely to be the speed-to-market facilitated by the efficiency of regulatory approvals,” Hogarth explained, adding that “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.”
We highlighted speed as a key issue a year ago. However it is likely to be the initial approval, registration and set-up of a new ILS vehicle that takes time, where as ongoing use for repeat transactions can be notified after the fact under the regulation. So once a vehicle is established it should be simple to continue to use, but the initial approval process is likely to be much slower than competing domiciles can offer.
However, in recent weeks the first UK ILS structure has already been registered, in the form of the NCM Re vehicle from Neon, which has become the first UK-based insurance special purpose vehicle (iSPV) to be approved by the regulators.
That approval has been relatively rapid, but of course it is just the first and should there be a rush of applications the question will be whether the regulator can maintain the pace, to compete with other domiciles.
ILS business, either in the form of private ILS and collateralised reinsurance or full catastrophe bonds, presents an opportunity for London to tap into reinsurance business that has to-date never been transacted in the country, despite the importance of the London market in the re/insurance world.
As such it is a high-profile initiative, which has much promise if the sticking point of speed-to-market can be overcome. The regulators have committed to trying to speed up the process over time, however to begin with the turnaround time for approving registrations of new protected cell company vehicles in the UK is likely to lag far behind the speed to establish an ILS vehicle in other domiciles.
Alongside speed, other factors that are key to the UK’s successful mission to secure a share of global insurance-linked securities (ILS) business will be the true cost (both real and frictional) to transact and operate in ILS in the UK, versus other domiciles, as well as the fact UK ILS vehicles will be mandated by the regulator to be fully-funded before risk transfer occurs.
But these sticking points and potential hindrances aside, the news that the UK has an ILS structure and regulatory regime that is ready to be used will be seen as positive by many in the market.
We’d imagine that some ILS service providers could establish transformer-style protected cell vehicles, which will be available for clients to use if they want to domicile a transaction in the UK. Additionally, some of the UK-based ILS fund managers, or those ILS fund managers who operate within the Lloyd’s market, may elect to set up a UK ILS structure for convenience.
We’d also expect that there will be some efforts taken by those involved in backing the UK ILS initiative to push through a high-profile ILS transaction in the UK. Perhaps this could be the previously discussed foreign aid catastrophe bond, or some other transaction involving the UK government’s Department for International Development (DFID).
We could also see more vehicles from Lloyd’s companies, like the Neon registration, as they increasingly look to the capital markets for reinsurance and retrocession.
Either way, we’d expect to see the UK ILS regulations put to some use in the coming months and that will be a positive step for the ongoing development of a global ILS issuance market.
Finally, Hogarth of Clyde & Co. said that the ‘onshore’ nature of the UK could also benefit it, “ILS have been gaining popularity over the last two decades and growth is set to continue. The strength of London’s reputation will serve as an advantage given recent disclosures around offshore tax havens, some of which have already become established ILS centres.”
However, we’d highlight here that the reinsurance industry utilises all manner of offshore jurisdictions quite happily today and this is likely to continue in the same manner, including with ILS business.
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