PRA to bring “flexibility & speed” to UK ILS, fast-track standard structures

The Bank of England’s Prudential Regulation Authority (PRA) confirmed this morning that it is working on making changes to its insurance-linked securities (ILS) regime, with a view to bringing greater flexibility and speed to the regulatory process.

Speaking at an event in London today, Alan Sheppard, Head of Insurance Policy at the Prudential Regulation Authority (PRA), accepted that many have a perception of the regulator and the regulatory process being too slow, but said the regulator is now working on ways to improve the UK’s ILS application process.

Sheppard could have been responding to the recent House of Lords Industry and Regulators Committee, which concluded that the “inflexible culture” of the regulators held back the United Kingdom’s ambitions to develop new forms of insurance and reinsurance business, such as insurance-linked securities (ILS).

Sheppard told the assembled audience in Westminster, London today, “As a regulator we want to play our part in facilitating investment of new capital in London and the expansion of business done here – regulators do quite like to have things to regulate, after all! But I am conscious that this is a highly contested market internationally, and there is a widespread perception that it has become relatively difficult to start new ventures in London, be they those backed by traditional capital, or the more innovative insurance-linked securities.

“I don’t think that that perception is entirely fair: there are recent examples of UK regulators moving swiftly to enable the investment of substantial capital in the traditional insurance market, without compromising prudential standards.

“But, fairly or unfairly, the UK’s financial regulators have acquired something of a reputation for being relatively slow and inflexible, and of engaging in excessive scrutiny of detail without due proportionality – and I am often told when I speak to market participants that that perception is deterring some businesses from even attempting to locate new ventures in London.”

Sheppard urged those seeking to establish regulated insurance and reinsurance structures in the UK to try the regulator outsaying, “you might be surprised at the difference between reality and perception, even under the current processes.”

But he acknowledged that change is needed, adding, “We are planning changes in our approaches to authorisation of traditional wholesale insurance ventures, and insurance special purpose vehicles (ISPV).

“We believe these changes have the potential to bring much greater flexibility and speed to the business of locating in London.”

Specifically on insurance-linked securities (ILS) activity in the UK, Sheppard said the flow of transactions since the launch of the regulatory regime in 2017 for ILS has only been “gentle” so far.

He said that “volumes have been disappointing, and not as high as some other, relatively new centres have achieved.”

The PRA has been engaging with industry to understand where the challenges lie and Sheppard highlighted three: the length of time for ISPV applications to be processed; the uncertainty of outcome (whether approval will be given or not); and the costs incurred, meaning the time and level of resources an applicant needs to deploy to complete an ISPV application.

Taking this into consideration, the PRA has decided to launch a fast-track ILS ISPV (insurance special purpose vehicle) application process for more vanilla arrangements, so the more standardised and shorter-tailed offerings, Sheppard told the audience.

“To address this feedback, the PRA intends to develop a ‘green channel’ for a category of ‘standard’, short-tail, general insurance structures. This green channel will give applicants more certainty over the outcome earlier in the process, and a faster decision,” he explained.

Adding, “PRA review will focus on the key transaction documents and clauses needed to demonstrate that mandatory authorisation conditions are met, ensuring that we take a more proportionate view of the risks posed by these structures.”

Sheppard also explained that further updates to the regulations may come in time, following additional consultation.

“We also plan to consult later this year on changes to the relevant supervisory statement to clarify and strengthen our approach to the regime in the light of the feedback we have been given,” he said.

The UK’s top regulator had previously acknowledged the need for improvement to the insurance-linked securities (ILS) regime, to make for swifter and easier issuance conditions and to attract more ILS and catastrophe bond activity to be transacted there.

It’s encouraging to see the regulator making strides towards this goal and a swifter approach for more vanilla ILS structures and transactions would really help, especially for multi-use ISPV’s and for repeat issuance catastrophe bonds.

It comes as Lloyd’s is seeking expanded approvals for its ILS structure, the London Bridge Risk PCC vehicle, which would also benefit greatly from this fast-track approach to more standardised and repeat use-cases, we’d imagine.

Also read:

Regulators “inflexible culture” hindered UK ILS ambitions: Lords Committee.

PRA looks to evolve UK ILS regime, after challenging start: Sweeney.

ILS an example of UK regulations failing to support industry: LMG CEO.

UK’s PRA wants to improve ILS authorisation process and speed.

UK Gov committee approves plan to exempt ILS from Stamp Duty taxes.

UK needs “flourishing insurance securitisation market” – TheCityUK.