Elements of UK ILS proposal could be improved: Ashurst

International law firm Ashurst has provided some feedback and commentary on the UK government’s proposed insurance-linked securities (ILS) framework, highlighting potential areas HM Treasury and the Prudential Regulation Authority (PRA) should take into consideration to ensure a competitive regime.

Ever since the UK government published its draft regulations for the facilitation of ILS business on its shores in November 2016, industry analysts, lawyers and observers have provided ongoing commentary and insight into how such a regime might look, and where amendments might be needed.

Despite the UK government being focused on Brexit negotiations, after its vote to leave the EU in June 2016, ILS business is still seen as a priority for the current UK government cabinet, which hopes to implement the new regulatory regime during the first-half of 2017.

The regulations remain in the consultation period, and international law firm Ashurst has commented on some key areas of the proposed framework that it feels should be addressed to ensure the UK ILS platform is a competitive and successful one.

“There is a clear demand for a UK market for ILS and we believe that the proposals in the consultation are a good step in the right direction. Market participants will inevitably benchmark the competitiveness of a UK regime against established benchmarks.

“While we acknowledge that any on-shore UK regime will need to comply with the overriding requirements of the Solvency 2 regime, there are still some aspects of the proposal that could be improved or refined,” says Ashurst, in a recent ILS briefing on the company’s website.

Ashurst’s comments are comprehensive and explore a number of potential issues and areas that it feels the regulator and the government should address to give the UK the best chance of creating a competitive and robust regime. But there were a few areas that Ashurst feels are of particular importance.

One of these is speed to market, something Artemis has discussed previously, and which is considered vital if the UK is serious about developing itself as a global hub for ILS business in a rapidly evolving risk landscape.

Ashurst explains that the six-to-eight week timeframe for the approval of new ISPVs appears to be uncompetitive, and suggests that the PRA approval process might want to allow for a “pre-issuance notification based on a reasonably developed term sheet with formal approval to follow shortly.”

Bermuda, a leading domicile for ILS business has a very fast and responsive regulatory regime around ILS business, and if the UK is going to compete with jurisdictions such as this speed to market will likely prove very important.

Ashurst also highlights the PRA’s proposed interpretation of the fully funded requirement as an area that should be rethought if the UK is to have a competitive and successful ILS regime.

“We believe that the PRA should take a proportionate interpretation of what is meant by “at all times”: in our view, this requirement should not be treated as a hair-trigger for regulatory non-compliance,” explains Ashurst.

Owing to the low-yield environment for UK and EU government securities, the funding requirement of the ISPV, says Ashurst, should consider all relevant factors, including any difference between the valuation of the vehicles assets and its maximum exposure to the cedent; the likelihood and history of claims, among other factors.

During the consultation process comments such as this from Ashurst are valuable to the ILS Taskforce, regulators and the UK government, so it’s promising to see that organisations are providing comprehensive feedback on the proposal.

Ashurst also explores tax and corporate tax issues, Solvency II regulations, public offer restrictions, authorisation and supervision of established vehicles, amongst other sections of the proposal.

Of course improving proposed rules is always possible and hence the consultation period. It is to be hoped that the final set of regulations include as much of the feedback as possible, so as to give the UK the best chance of attracting some ILS business to its shores.