The UK Government has now published its draft regulations for the facilitation of insurance-linked securities (ILS) business, with the goal of establishing London as an ILS domicile. The publication sets out proposed corporate, tax and regulatory framework for ILS, and has been well received by the London market.
Artemis wrote earlier this week that the UK Treasury department was working to ensure further information regarding the facilitation of ILS in the region was included as part of the government’s Autumn Statement. And now, with a view to having a UK ILS regulatory framework implemented in early 2017, the UK Treasury has published a consultation paper that provides some more details on the matter.
The UK government began its mission to lay down the rules necessary to bring ILS business to its shores in the March 2015 budget, providing further information on the way it would desire ILS structures in the UK and London to be treated for taxation in the March 2016 budget.
The consultation and draft regulations published today explain that the government proposes to establish a protected cell company (PCC) regime for multi-arrangement special purpose insurers/vehicles (SPIs/SPVs). Regarding Solvency II, the paper explains that the “proposed UK protected cell company regime is designed to meet these Solvency II requirements through a strict segregation of risk transfer contracts, therefore providing confidence to cedants and investors that deals will be robustly segregated.”
The consultation paper goes into greater detail about the use of a PCC for ILS business, including how it will be used to segregate ILS deals, rules and functions of a PCC regime, insolvency concerns and so on, and also that utilising a PCC regime for other financial services activities would remain under review.
The draft seems very focused on collateralised reinsurance as the opportunity for London and the UK, which fits well with the specialist nature of Lloyd’s and the London reinsurance marketplace.
Malcolm Newman, sponsor of the London Market Group (LMG) Board that is dedicated to building a better business environment, commented on the draft publication. “We are delighted that the process has reached this stage and we warmly welcome these draft regulations – which have been developed with the full input of our task force. By facilitating the entry of the UK into the dynamic ILS market, the government is giving very positive support to the London Market’s growth agenda – an agenda given renewed vigor by Brexit.”
The draft regulations also provide details on taxation surrounding ILS business, and states that the government proposes a bespoke taxation regime for ILS, which includes “exempting the insurance risk transformation of ISPVs from corporation tax, a complete withholding tax exemption for foreign investors,” and “UK investors being taxed as normal according to their facts and circumstance.”
This approach, says the UK Treasury draft report, is designed to create a taxation regime that is competitive globally, but also in line with the UK’s transition to a territorial tax system.
The paper also explains that exempting the SPIs/SPVs core insurance risk transformation from corporate tax is necessary if the UK is to compete with other ILS domiciles around the world, and take advantage of the expanding marketplace.
Taxation is one of the key issues surrounding the development of these regulations and by exempting the structure from UK tax it will create a more level playing field, which is good for global players looking to diversify their use of ILS domiciles as well as those specifically wanting to access risks in London.
Inga Beale, Chief Executive Officer (CEO) of the specialist Lloyd’s of London insurance and reinsurance marketplace, also commented on the UK Government’s ILS announcement.
“It is clear that London should be competing in the ILS market which will bring considerable benefit to the London Market as a whole, so we welcome today’s announcement from the Government. ILS capital has been growing, particularly in global reinsurance, and the London Market has the expertise and talent to select the risk that it wants to invest in.
“We look forward to working with the Government and the LMG to ensure that this work can help London maintain its position as the leading global hub for reinsurance,” she said.
Importantly the paper also outlines proposals for the supervision and authorization of SPIs/SPVs under Solvency II in the UK. A consultation paper from the Prudential Regulation Authority (PRA) and the Financial Conduct Authority (FCA) outlines the proposed framework.
“There will undoubtedly be debate and discussion over some issues but we look forward to a constructive dialogue with government and the regulators to refine the proposals so that ILS business can be conducted onshore in the UK in 2017. Once we have the legislation in place, we can start the vital of work of attracting business. We want to use our strengths and our ability to innovate to create new products and grow the overall re/insurance market,” added Newman.
The question of course will be how efficient the regulator can be in establishing ILS structures in the UK, as speed to market and a frictionless approach are key selling points for using offshore domiciles, where regulators are smaller and red-tape perhaps more easily navigated.
A second question may be why an ILS investor or fund manager would feel the need to transact in the UK, when it is already working so well elsewhere. But that will come down to the growth of the ILS market which will in time lead to greater need to diversify and specialise in different insurance or reinsurance markets, we believe.
Hence, setting itself up for ILS business may not result in immediate wins for the UK, but with the use of direct capital market backed collateralisation of insurance risks set to rise over the coming years it is important to get a working regulatory regime in place in order to be part of it and to maximise London’s role in ILS market growth.
The full consultation information and draft regulation can be read over on the UK Gov website.