One factor is set to be absolutely key in the United Kingdom’s ambitions to become a hub for insurance-linked securities (ILS) transaction, the speed with which an application to launch a structure can be approved.
The UK wants to bring ILS to its shores and has published new draft regulations and details for the proposed tax treatment of insurance-linked securities (ILS) vehicles that will be domiciled within its financial market.
The proposals are sound, drafting the rules around the establishment of multi-arrangement Insurance Special Purpose Vehicle’s (ISPV) which would very well suit the needs of any ILS fund manager seeking to transact collateralised reinsurance within the UK market.
This protected cell company (PCC) regime for multi-arrangement ISPVs (mISPVs) can see the vehicle used for single or multiple transactions, rather like a special purpose insurer SPI in other domiciles. Cells can be collateralised and issue shares or securities, which suggests there use can be for multiple transaction structures, from a simple collateralised reinsurance arrangement, to a multi-investor reinsurance sidecar or a catastrophe bond type issuance.
But no matter how flexible the structure can be and how many types of transaction can be effected using it, one question that will always crop up is just how responsive and quick to market can the UK regulators be.
The proposal is that a UK IPSV application could be approved within 8 weeks, but this is supposed to be only for the most simple and standardised structures while anything more complex or customised could take longer.
Lawyers at international lawfirm Simmons & Simmons said; “Bermuda’s regulator is famously flexible and fast. To compete the UK would need to be able to react speedily and decisively in supporting the market and enabling the creation and authorisation of the relevant SPVs and suitable regulatory treatment of insurance linked securities for investors (many of whom are insurance companies themselves).”
The UK is faced with the prospects of having two regulators involved in approval of ISPV’s, which could result in a slower process potentially.
Applicants wishing to establish an mISPV, whether to be used as a protected cell company (PCC) or a single use vehicle, will need to deal with both the Prudential Regulation Authority (PRA) and the Financial Conduct Authority (FCA) in order to receive authorisation for an ISPV to be used for insurance risk transformation.
With the initial proposals suggesting an authorisation timeline of 6 to 8 weeks for simple applications, that would put the UK a little slower than this can be done in other domiciles. However Simmons & Simmons has noted that it could take even longer, saying that; “The PRA is hedging its bets by noting the time-sensitive nature of ILS transactions but suggesting pre-application discussions to ensure fully completed applications.”
So having an expectation of it taking 6 to 8 weeks plus giving the regulator advance warning could be the best way to approach this, for those looking to set up an mISPV in the UK. More complicated structures and uses are likely to take longer.
It’s to be assumed that as the two regulators become more familiar with the structure and the ILS market in general the authorisation process could become speedier, but whether it could ever be as rapid as a small domicile where you can get a regulator on the phone to discuss your application seems a lot to ask for the UK and London.
Simmons & Simmons believes the authorisation process could be the bottleneck, saying; “We have some concern that involving 2 regulators and needing separate approval for each and every commercial transaction is going to cause delay and overly complicate matters, which will make the UK uncompetitive and risk the whole project being a non-starter unless it can be streamlined before implementation.”
It’s a good point though. The authorisation process is vital and streamlining this prior to implementing the regulations would be a real selling point to attract potential transaction sponsors, issuers, ILS fund managers and investors to get a vehicle set up and running in the UK.
It’s important to note though that just because it might be slower does not mean the UK ISPV’s won’t be used.
The regulations seem tailored for the likes of an ILS fund manager to set up a multi-use ISPV in which to transact multiple collateralised reinsurance deals with London market companies. That sort of structure would not be something that you’d apply for just before a renewal, rather you’d get it in place in plenty of time in advance.
The potential 6 to 8 week timeline would be more of an issue for transactions that are part of a reinsurance renewal, such as a first catastrophe bond issuance, where sponsors can be out testing the market in advance to see what form of capital and transaction is most attractive, before wanting to turn around the securing of cover, in whatever form, as quickly as possible.
So while speed is clearly of the essence and one area other domiciles have a true advantage that London and the UK may never be able to compete with, it does not mean the regulations are futile by any means.
In fact, what we hope to see is some further guidance, perhaps from brokers, Lloyd’s of London or others, on how exactly the ISPV’s in the UK can be best put to use.
We’re sure those conversations will be going on behind closed doors, but for the sake of transparency and to educate the large ILS investor base and those interested in ILS some use-cases of when a UK ILS structure may be beneficial to invest in could be very useful while the consultation process proceeds.