The United Kingdom’s insurance-linked securities (ILS) and risk transformation regulations offer “a landmark opportunity to strengthen London’s influence in the global (re)insurance market,” according to Des Potter, Managing Director, GC Securities.
The UK’s insurance-linked securities (ILS) regulatory and tax framework was passed by its government towards the end of 2017, after a significant amount of work between the regulators, insurance and reinsurance industry representatives and the government itself through the input of HM Treasury.
Potter explained that the ILS framework is an example of industry and Government working together to “bring innovative and long-lasting benefits to the UK (re)insurance economy.”
He noted that the first two transactions, the first being the NCM Re reinsurance sidecar like vehicle launched by Neon to support the property underwriting portfolio of its Lloyd’s syndicate, followed by the $300 million Atlas Capital UK 2018 PLC (Series 2018 ISPV 1) catastrophe bond, the first UK cat bond, are a “positive start.”
But went on to explain that the market needs to examine these transactions to identify “what lessons can we learn to enable London to build on this and achieve its ambition to become a global hub of innovation for the ILS market?”
“The key to London’s success will be innovation that matches the right risk, with the right capital, at the right price, in the most efficient form of risk transfer,” Potter said.
And explaining why this is vital for London’s future he continued, “The experience of the reinsurance market after the catastrophe losses in 2017 demonstrated that for many, the ILS market is currently the ‘right’ source of capital for property cat risks. The ILS market has been a catalyst for the current evolution in the reinsurance market – London must be at the forefront of this change to maintain its global presence.”
Potter hinted at one of the issues that the market has cited regarding applications for UK ILS transactions, that they must be quick to market.
He explained that, “We must recognize that the new regime marks a steep learning curve from a regulatory standpoint and the Prudential Regulatory Authority (PRA) have been diligent in their assessment of applications. They are deploying significant resources to assess each application and it is also understandable the challenge involved to confirm all aspects of the Solvency II regulations for ISPVs are fully satisfied, as with each authorization they are setting market precedents. It is also important to understand the regulatory environment of each cedant, to enable them to obtain full capital credit for risks transferred to UK ISPVs.”
It’s true, the regulator like the market must get up to speed before the pace of approvals will reach an equilibrium, so some patience is required by market practitioners before they can expect issuing catastrophe bonds or other ILS in the UK will be as rapid as other, more established and experienced regimes.
But overall it is key for the London insurance and reinsurance market to have ILS as an offering, part of its risk transfer structure product range for the market to choose from.
London has deep capital markets and access to them could become much more efficient for re/insurers, if the regime is continually updated and addresses the pain points sponsors and participants in ILS deals can feel elsewhere.
The industry must work proactively with the PRA to help their understanding and mitigate any concerns they may have,” Potter said, “Particularly with the three mandatory conditions regarding the contractual arrangements to transfer risk to an ISPV, namely that it is at all times fully funded, that the transfer of risk is effective in all circumstances and that the claims of investors are at all times subordinated to the (re)insurance obligations of the ISPV.”
Overall the regulations and ability to host ILS transactions is positive for the UK economy, as Potter pointed out.
“This provides a landmark opportunity to strengthen London’s influence in the global (re)insurance market. The PRA will continue to apply the necessary level of diligence to each application and potential investors and risk transfer counterparties would expect London to operate to a high standard. The key is to ensure it is a standard that is commercially competitive and drives growth in business and employment opportunities for the UK economy,” he urged.