UK Gov budget targets ILS & cat bonds, aims to become ILS domicile

The United Kingdom government will seek to develop a corporate and tax structure that allows for insurance-linked securities (ILS) such as catastrophe bonds to be domiciled locally. The measure was announced in the 2015 Budget today.

Chancellor George Osborne announced to Parliament that his government would “take steps to promote competition, back FinTech and encourage new business like global reinsurance.”

The budget documents themselves explain that part of this would be an attempt to make the UK onshore financial market an attractive domicile for ILS structures in the future.

The budget documents explain:

2.228 Global reinsurance – The government announced at Autumn Statement 2014 that it would explore options to attract more reinsurance business to the UK. To take this forward, building upon the UK’s position as a world leader in the global insurance market, the government will 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. This alternative form of reinsurance makes greater use of capital markets and is a key growth opportunity for the sector.

This has the potential to be big news for the London reinsurance market as it would enable players there to domicile ILS vehicles and structures locally, in a competitive tax environment. Just how competitive that environment would be with the dominant domiciles in the ILS space remains to be seen.

A number of things would be in favour of the UK becoming an ILS or cat bond domicile. Its mature regulatory environment, the availability of specialist service providers, the size of the reinsurance market, the amount of ILS investors and managers located in the UK and the financial infrastructure.

However it will face a tough task winning business, unless it can provide a very efficient, rapid and cost-effective ILS domicile regulatory framework.

Seeing ILS mentioned in the budget documentation of a country with a financial services market the size of the UK is surprising, but perhaps shows just how attractive this business is and also the expectation that this market will grow, meaning that the UK feels it cannot stand aside and watch others take this business to their shores.

It will be interesting to watch the development of any corporate and tax laws for ILS in the UK to see just how competitive it will be with both the dominant and new-comer domiciles in the insurance-linked securities and catastrophe bond space.