PRA says collateral roll-over “should be possible” under UK ILS regime

The United Kingdom’s Prudential Regulatory Authority (PRA), part of the Bank of England, said it should be possible for market participants to structure insurance-linked securities (ILS) that include roll-over provisions under the UK ILS regime.

The Prudential Regulatory Authority (PRA) has published a new consultation paper in which it lays out a number of areas of clarification and change for the UK insurance-linked securities (ILS) regime.

The Bank of England and PRA have been looking to ensure that the UK’s insurance-linked securities (ILS) and risk transformation regulations are as efficiently implemented and easy to use as possible.

As a result they’ve been trying to update areas of the ILS regulations that the market has provided feedback on and called for change, one of which has always been how collateral roll-over would be treated (if at all) under a Solvency II compliant ILS regime in the UK.

The PRA doesn’t feel there is any problem, believing that it is possible to continue meeting the SII requirement for a fully-funded ILS vehicle while still including roll-over in an ILS structures documentation.

“The Solvency II requirements on fully funded have not changed since the original policy statement was published prior to the commencement of the UK regime in 2017. However the PRA considers it should be possible for market participants to structure mechanisms under the UK ILS regime which include provisions to ‘roll-over’ funding, while meeting the fully funded requirement,” the consultation paper explained.

However, this all seems to depend on your definition of fully-funded and also how you’re used to collateral roll-over working.

The regulation proposed hinges on the Aggregate Maximum Risk Exposure (AMRE) still being funded in the current ILS structure and if a roll-over is required then funding can only move across once the original AMRE is reduced, to fund a new ILS structure’s AMRE.

It’s not clear whether that will support certain edge cases, where funding can take some time to move between collateral accounts etc, which had been a concern for some market participants. But the PRA’s tone is perhaps more hopeful that roll-over’s will be possible in future under the UK ILS regime.

The roll-over issue has been a significant one, which has held back the use of the UK ILS regime to-date. Whether this consultation will put that issue to bed is unclear for now, but the fact the PRA feels collateral roll-over can be achieved will please some in the ILS market.

The consultation document also includes details of a newly proposed more “proportionate approach” from the PRA to issues such as documentation readiness, documentation legal execution prior to transaction and also the PRA’s view on third-party legal opinions on ILS transactions.

These suggest that documentation completeness may no longer hold back getting an ILS transaction consummated, which had been another sticking point that has hindered use of the ILS regime.

As well as funding and documentation, the consultation also address risk transfer requirements, to help applicants understand how they can show their compliance against the Solvency II risk transfer requirements.

Further updates to forms for adding new risks to a multi-use insurance SPV (MISPV) are also detailed, which should reduce the volume of new information required every time an MISPV enters into new contracts.

This could help to increase uptake of the MISPV for collateralised reinsurance, as that had been an area that the UK had hoped to see more activity, but the market had not responded too favourably to date.

Other proposals suggest ways to streamline applications where transactions are relatively similar and to reduce duplication of effort. There seems to be a real focus at the Bank of England in trying to reduce the burden that comes with their regulatory applications for ILS and collateralised reinsurance transactions here.

The UK has seen some success since it implemented the ILS regulatory regime, with a number of catastrophe bond issues including one renewal, a collateralised reinsurance sidecar placed and renewed, and a multi-use collateralised reinsurance Protected Cell Company (PCC) vehicle established in the UK.

But, it has been slower going than was desired, resulting in a continued need for the regulator to improve the processes involved in the UK ILS regime to ensure the market feels its comments are being taken seriously and the ILS regime can be as efficient to use as possible.