As the UK’s top regulator, the Prudential Regulatory Authority (PRA), looks to further evolve the UK insurance-linked securities (ILS) regime, it’s outlined some proposed changes to the authorisation and supervision of insurance special purpose vehicles (ISPVs).
In a recently published consultation paper, the PRA notes that since the launch of the HM Treasury’s Risk Transformation Regulations in December 2017, which allowed for the creation and ongoing regulation of protected cell companies which could be used by ISPVs, additional experience has been gained.
This, alongside feedback from the industry, resulted in the PRA introducing an updated authorisation process, ultimately designed to improve speed-to-market and bring greater flexibility to the UK ILS regime.
Now, the PRA is consulting on a broader set of changes which it says aim to “support the development of the UK ISPV regime,” which, in turn, is “likely to enable market participants making more informed decisions regarding their participation in the ILS market in the UK.”
According to the PRA, such participation is expected to enable new ways of raising capital in the UK insurance marketplace, simultaneously allowing the PRA “to take a more proportionate, risk-based approach to market participants in a manner that does not increase safety and soundness concerns.”
Specifically, the PRA has outlined five policy proposals in its latest consultation paper, including: change to the legal opinion expectation for non-English law governed contracts; clarification on the number of senior management function (SMF) holders needed for an ISPV; clarification of approach to multiple cedants ceding risk to a single cell via a single contract; clarification on the interpretation of ‘quantifiable risk’; and clarification on the requirement for written policies for ‘standard’ applications.
On the first point, the PRA is proposing to amend expectations of ISPVs to submit a legal opinion non-English law governed contracts, so that such an opinion would not generally be expected, which in turn would allow the PRA to focus its review of legal opinions to complex cases.
The second proposal concerns the number of SMF holders required for an ISPV, and specifically seeks to clarify that, for a ‘standard’ application, a single individual could hold or perform more than one of the three required SMF roles for an ISPV. For ‘complex’ applications, the PRA does consider that the three roles may need to be held by different individuals.
The PRA feels that this would enable standard structures to be managed by one individual with the relevant skills and experience, while for complex structures the regulator says that ISPVs should demonstrate the right variety of SMFs. All of this, says the PRA, would improve transparency.
On the third point, the PRA is seeking to clarify its expectations on more than one cedent within an insurance group transferring risk to a single cell, as it recognises that limiting this might prevent groups from entering into certain transactions through an ISPV.
As a result, the PRA now considers “that allowing more than one insurance entity from a group to cede risks, subject to an aggregate limit, within a single contract to an ISPV (or a cell of an MISPV)3 may be appropriate, as long as the intention is to cede as a group and the multiple cedants within the group act like a single economic unit, with aligned interests in the single contract.”
The next proposal concerns the PRA’s interpretation of the definition of quantifiable risk as it relates to ‘standard’ applications. With these types of contracts, the PRA generally expects quantifiable risks to capture, at the least, insurance risk, market risk, operational risk, and asset risk which may exist in the ISPV. The PRA feels that this proposal would also improve transparency, and make it easier for ISPVs to assess their quantifiable risks relevant to their arrangements.
Finally, the PRA proposes that applicants for ‘standard’ ISPVs would no longer be expected to submit a full suite of written policies in relation to the system of governance, and instead submit a summary description of written policies in place for the structure.
“The PRA considers that this proposal would introduce a more risk based and proportionate approach, ensuring that the burden placed on firms would be proportionate to the expected benefits, and ensure the PRA would be using its resources in an efficient and economical way. It would also improve transparency by clarifying what applicants are expected to share with the PRA,” says the PRA in its consultation paper.
Regarding timing, the PRA has proposed that the earliest implementation date for changes resulting from its consultation paper would be by the end of November, 2022.
These seem quite specific amendments, likely in response to feedback received from the market, so it is to be hoped they align with the needs of cedents and investors, or investment managers.
If they do, then this should be a positive set of updates to the UK’s ILS regulatory regime that could help to stimulate additional issuance activity in the country.
However, while some of these promise to add additional flexibility to UK ILS issuances and approvals, they may not tackle the other key issue that market participants have been citing, which is the speed to market still being slower than other ILS domiciles.