The UK government’s draft regulatory framework for facilitating insurance-linked securities (ILS) and collateralised reinsurance business is progressing on its journey through the political houses, now reaching the Report stage in the House of Lords.
Legal process in the UK can be lengthy, with bills proposing new laws able to begin their life in either the House of Lords or Commons, passing through one before the other with a number of readings during which amendments can be made introduced or indeed dropped, before heading for Royal Assent.
The ILS regulation is being considered as an amendment to the Bank of England and Financial Services Bill. The amendment would be added to the Financial Services and Markets Act 2000, providing the UK government and HM Treasury with the ability to enact legislation to create an ILS regulatory framework for transformer companies.
The proposed amendment details a special purpose vehicle for insurance and reinsurance purposes that would be a transformer with a segregated or protected cell type structure, with the ability for investments issued by the vehicle to be traded.
The transformer SPI would also be able to access the Lloyd’s market it seems, as we wrote on the 10th November here, which perhaps hints at Lloyd’s being able to establish itself as a warehouser and packager of risks to be distributed directly to the capital markets.
The draft amendment was taken back in front of a House of Lord’s committee on the 11th November for another reading and line by line examination, which saw it passed and printed with the amendments. The bill next goes to the Report stage in the House of Lords, followed by a third reading after which it will move on to the House of Commons. The Report stage in the Lords has yet to be scheduled.
The lengthy UK legal process through the Houses and government readings means it could be a while before these amendments get to Royal Assent. However as they’ve already made it this far and there is little in them to suggest any push back is likely, it seems almost certain they will be accepted and made law.
Once passed the HM Treasury will have the ability to regulate the formation and operation of transformer insurance and reinsurance vehicles for ILS. How they get put to use will be interesting to see, whether they are largely used just to ease access to the Lloyd’s market for ILS investors.