UK Gov to legislate for risk transformation and ILS flexibility to promote innovation and growth

The Government of the United Kingdom through HM Treasury has now published its response to the July 2025 consultation on a more flexible and extended risk transformation regime, saying it will pass reforms through legislature to promote insurance-linked securities (ILS) innovation in the country and facilitate a wider range of transaction structures.

We reported back in July 2025 that the UK Government had launched a consultation on its Risk Transformation Regulations, citing a goal to make the regime, which is largely applicable to catastrophe bonds and insurance-linked securities (ILS), more flexible and to also allow for more ILS transaction types.

Now, the UK Government has responded to the comments received on its consultation and said it will take a number of actions forward to both primary and secondary legislation, to reform the cat bond and ILS regulatory regime and better meet the needs of those seeking to enter into risk transfer arrangements backed by investors.

The reforms that will now be enacted affect the UK’s insurance special purpose vehicle (ISPV) structure, which is suited to risk transformation for insurance-linked securities, such as catastrophe bonds.

HM Treasury said that the planned reforms will introduce more flexible funding requirements and authorisation processes for transformer vehicles, and enable cells in a protected cell company to take on multiple risks from multiple persons.

The goal was always to simplify what were seen as overly burdensome funding requirements and enable a more flexible authorisation process, while increasing access to market and making the PCC structure more flexible for users.

HM Treasury says that respondents were “consistently positive about the legislative changes proposed in the consultation.”

“They considered the changes addressed aspects of the framework that have been holding the UK’s offering back and that, without reforms, the UK would fall further behind international competitors. Respondents encouraged continued refinement of the regime to support proportionate and efficient treatment of risk transformation, noting that flexibility in supervisory processes, wider measures on tax and government support all influence the attractiveness of the regime,” the consultation response published today explains.

The UK Government added, “If successful, the changes could lead to a substantial increase of new capital in the sector. They have the potential to help the wider UK economy through: (i) strengthening the UK’s position as a global financial centre; (ii) job creation in financial, legal and advisory services; (iii) enabling more insurance coverage for critical activity such as infrastructure projects; and (iv) boosting inward investment. However, the government recognises that the extent of this benefit is, at this stage, uncertain.”

On more flexible funding requirements, the consultation response from the UK Government states, “The government intends to use primary legislation to clarify existing funding requirements. The intention is that the PRA should be able to diverge from the requirement for the proceeds of any financing mechanism to be fully paid‑in. Clarifying this point would give the PRA greater discretion over funding requirements for transformer vehicles and align the UK more closely with more flexible regimes, like Bermuda.

“The core features that differentiate risk transformation from insurance would remain. Transformer vehicles would still need to hold assets whose value is at least equal to their maximum liabilities.

“However, the changes would allow the PRA, through regulatory rules, to specify which assets or alternative financing mechanisms are permitted and when, as well as how assets and liabilities should be valued. The PRA may vary its requirements depending on the type of business being transferred. The government notes the importance of clarity for applicants, particularly when they consider the UK alongside alternative jurisdictions, and intends to work closely with the PRA to ensure such considerations are fully taken into account as they develop their rules.”

One other point consulted on, was the opening up of the risk transformer ISPV use-cases to non-insurers, such as corporate or sovereign sponsors of ILS instruments like catastrophe bonds.

Here, there is no immediate legislative changes being made, but ongoing work with the regulator to define what is possible and prudent, it seems.

The UK Government wrote, “The government recognises that risk transformation is a specialist activity requiring specialist capabilities. Amending the regulated activity of risk transformation to facilitate non-insurers ceding risk directly to transformer vehicles therefore requires adequate safeguards, as well as detailed consideration of overlap with other regulated activities.

“The government has concluded that there is more work to do on this policy proposal, to ensure any legislative changes retain the safeguards and legislative restrictions needed to prevent misuse and unintended consequences. For this reason the government has decided, at this stage, not to proceed with legislation but instead to continue work with the PRA and the FCA to explore this proposal further.”

A second area where immediate reforms are set to be pursued is in the flexibility at authorisation, where the goal is to increase it.

The government explained, “The government remains committed to increasing the flexibility available to transformer vehicles, particularly those using PCC structures which are most likely to need to vary their approach over time to support changes in cedent and investor preferences.

“The government will proceed with reforms to deliver such change. As proposed, the government will amend regulation 7 of the Risk Transformation Regulations 2017 so that the PRA is no longer required to limit a transformer vehicle’s permissions at authorisation. Instead, the PRA will be able to determine, in line with its statutory objectives, whether it is appropriate to incorporate limitations.

“The government will also amend regulation 7 to facilitate greater flexibility for the PRA in defining transformer vehicle permissions, with a view to reducing the operational burden on both applicants and the PRA.

“The government will work in parallel with the PRA in the coming months on the details of the legislation. The government understands that the PRA intends to consult on further reforms to the authorisation process for transformer vehicles to take account of this greater flexibility.”

On making protected cell companies more flexible to allow for more contracts and counterparties, further reforms are now set to be enacted.

“The government is satisfied that this proposal will improve the functioning of PCCs. Therefore, the government will use secondary legislation to allow cells to enter into multiple contracts with multiple cedents,” HM Treasury said.

Adding, “The PRA already has rules in place to manage risks and sets clear expectations relating to multiple contracts and multiple cedents in a transformer vehicle. The government views these as appropriate for the cells of a PCC undertaking risk transformation. As a result, the government does not intend to introduce any additional legislative requirements in this space. The PRA has agreed to keep its rules under review to ensure that they align with this policy intent, to allow multiple contractual arrangements and counterparties, and ensure that their rules are sufficiently open to innovation in the market.”

The ILS related updates to UK laws will make for a more flexible environment for ILS and cat bond sponsors, issuers and investors, while the PCC rule change for multiple contracts and counterparties to be allowed will also support the needs of asset managers (including ILS managers) who want to establish structures and transact in the United Kingdom.

Finally, not related to insurance-linked securities, the UK Government is going to legislate to allow PCCs to be used within the context of the new UK captive insurance framework.

The UK’s captives insurance regime will launch in summer 2027 and this rule change for PCCs is not expected to be in place for launch, but the government said it will work with the PRA to get that in place as soon as practicable as well.

The UK Government said the process now will continue towards enacting primary legislation for these changes to the Risk Transformation regulations and the ISPV, to act on the desired flexibility changes and to promote innovation in ILS and growth within the United Kingdom.

Primary legislation will be introduced as soon as Parliamentary time allows, the Treasury explained, to clarify the funding expectations for transformer vehicles and to provide the powers for secondary legislation related to the PCCs.

Commenting on the HM Treasury announcement today, the Prudential Regulation Authority (PRA) said that it, “welcomes HM Treasury’s (HMT) proposals to progress legislative reforms to the UK’s risk transformation regime, affecting insurance special purpose vehicles (ISPVs), and to enable the use of Protected Cell Company (PCC) captives.”

The PRA further stated, “The PRA already introduced reforms in 2025 to enhance the UK ISPV framework, eg by the introduction of an accelerated pathway for certain ISPVs. The PRA plans to consult on further ISPV reforms, intended to add further simplicity, flexibility, access and to also improve PCC use for ISPVs, in due course following the removal of legislative barriers.”

Recall that, the PRA also recently said that it will continue to work with the HM Treasury on further reforms to enhance insurance-linked securities (ILS) and catastrophe bond frameworks in the United Kingdom in order to amplify competitiveness within the market.