This afternoon the United Kingdom’s insurance-linked securities (ILS) and risk transformation regulations are to be debated by a cross-party parliamentary committee who will debate the measures and get to give the final approval before the new rules are enacted.
Typically considered to be a formality, this stage of the process is generally considered to be a rubber-stamping exercise and members of the working group that helped to formulate the UK’s ILS regulatory regime are expecting the two pieces of legislation, the Risk Transformation Regulations 2017 and the Risk Transformation (Tax) Regulations 2017, to both become law in the coming days.
The UK ILS regulatory regime has been through a long process to get to this stage, with the London ILS taskforce having been set up to provide industry input and push forward the initiative in mid-2015 and the UK Government’s consultation process having begun in March 2016.
In reality the process has taken longer still, as discussions began in 2014 between industry participants and those in government and regulatory circles in London, as the local insurance and reinsurance market looked to address what it saw as a threat, as ILS business began to eat into market-share.
Of course today ILS and alternative reinsurance capacity is no longer seen as such an overt threat to re/insurers as it was in 2014, rather it is accepted as a complementary or companion source of capital and will in fact pay a significant proportion of the London market’s claims from recent catastrophe losses as a key reinsurance and retrocession provider.
But London and the United Kingdom wants to be able to offer a regulatory platform that can support ILS business, including collateralized reinsurance, catastrophe bonds and other structures, hence the eventual enactment of the legislation by Parliament will be considered a positive step in the modernisation of the local business platform.
The Fifth Delegated Legislation Committee will review the draft Risk Transformation regulations and associated tax proposals today and as long as no objections are raised the regulations will then be ready to be enacted and become law.
At this stage of the year and with the January reinsurance renewals fast approaching it seems impossible that any ILS business could be transacted in London at 1/1, but with the pipeline building for issuance in 2018 it is inevitable that vehicles will be set up and some use of the regulatory regime will be seen in the months ahead.
Still, questions remain over the requirement for UK ILS vehicles to remain fully-funded at all times and the potential for this to create issues with the rolling over of collateral into new transactions at renewals.
However it’s likely that these will be overcome and the desire, among those ILS sector participants that have been pushing the UK ILS regulatory regime forwards, to see it used will undoubtedly result in business being transacted using it.
Additionally, as ILS fund managers and the overall ILS market grows, there is a need for regulatory choice and this is likely to lead to ILS issuance becoming more global in time, rather than being concentrated in specific domiciles. This will benefit existing domiciles too, as choice and a range of options will ultimately help the market to grow.
Although some ILS market participants are less inclined to try a new regulatory regime, preferring not to expose their investors to any uncertainty that could emerge with brand new regulations and an untested regime.
The regulations have now been debated by industry, regulators, Parliament and the House of Lords, with this committee the latest to get to cast an eye over the legislative and tax related proposals.
Today’s committee and the successful continued passage of the regulation towards becoming law in what could be a matter of days will be the final stage of oversight in the process.
After which, once enshrined in law, this comes down to business as usual and the focus will turn to speed to market and the regulators ability to help ILS transactions be approved and completed quickly and efficiently, to provide a true alternative to other more established ILS domiciles and their regulatory regimes.
Join us in New York in February 2018 for our next ILS conference