PRA to assess whether UK ILS regs need post-Brexit transition changes

The United Kingdom’s Prudential Regulatory Authority (PRA), part of the Bank of England, said it will keep its policy related to insurance-linked securities (ILS) and insurance special purpose vehicles (iSPV’s) under review as the Brexit transition proceeds, in case any changes are need.

The UK’s withdrawal from the European Union, the so-called Brexit process, has always cast a shadow over the country’s efforts to attract insurance-linked securities (ILS), catastrophe bond and other collateralised reinsurance business through its new ILS regulatory and tax regime.

Uncertainty associated with Brexit and how that could affect sponsors use of the UK ILS regulatory regime has been highlighted as one of the issues that held back ILS activity in the country, after the legislation was initially passed.

Now, the UK has officially withdrawn from the European Union but a transition period is underway, during which time the UK remains subject to European law.

The Brexit transition period is set to run until the end of 2020, during which time the UK and EU are supposed to be negotiating additional arrangements for the full-withdrawal.

During this transition, current rules on trade, travel, and business for the UK and EU remain in-force, but with some uncertainty now over how long the transition could last and whether it could be extended, this has become a particular item of relevance where ILS and reinsurance market participants may need greater certainty before they are encouraged to the UK’s ILS regime.

The Brexit transition period has become even more relevant in the last few days, as UK media sources are suggesting that Parliamentarians may look to extend the length of the transition, as it’s felt that negotiations have not advanced sufficiently to guarantee it can be finalised by the end of this year.

All of which adds to uncertainty for ILS and reinsurance players looking to the UK’s new ILS regulatory and tax regime.

Most believe that the ruling Conservative party won’t support any extension of the Brexit transition period, despite the fact progress has clearly been delayed by the Covid-19 pandemic interruption.

But the PRA has said in the last few weeks that it intends to keep the ILS related policy under review with respect to the Brexit transition and full-withdrawal, as it recognises that the final withdrawal could mean further changes are necessary.

“The PRA will keep the policy under review to assess whether any changes would be required due to changes in the UK regulatory framework at the end of the transition period, including those arising once any new arrangements with the European Union take effect,” the regulator explained.

Of course, given the negotiations continue, this just serves to prolong the Brexit-linked uncertainty for the UK’s ILS regime, which could hinder getting potential insurance and reinsurance company sponsors onboard, as well as investor interest in the ILS infrastructure established in the UK.

Brexit was already acknowledged as one of the factors deterring use of the UK ILS regime.

We made need to understand the final outcome of the transition and full exit from the EU, before the UK’s ILS regime can be fully-tested and we can understand whether use of the UK ILS structures and regulatory environment will increase.