UK needs “flourishing insurance securitisation market” – TheCityUK

The United Kingdom needs to work with insurance, reinsurance and capital markets participants, as well as regulators, to develop a “flourishing insurance securitisation market”, making the most of the insurance-linked securities (ILS) regulatory regime that was introduced in 2017, according to a lobby group.

Lobby group TheCityUK has worked with business groups, companies and partners across the UK financial services sector to lay out a new international strategy that aims to return the UK to being the world’s leading international financial centre within five years.

Insurance and reinsurance is obviously a key part of this strategy, given the importance of the London marketplace and Lloyd’s in global risk transfer.

But insurance-linked securities (ILS) are also deemed particularly important, as the UK has not yet capitalised on the opportunities presented by the enactment of its Risk Transformation Regulations 2017, the ILS regulatory and tax regime introduced a number of years ago.

ILS activity in the UK has been relatively slow since 2017, with a handful of transactions completed and housed in UK special purpose reinsurance vehicles.

But TheCityUK feels this is a missed opportunity and urges the financial services sector in the UK to take advantage of the regulatory regime and work to improve it, so that the UK can have this “flourishing insurance securitisation market” to compete with other global reinsurance and risk transfer hubs.

Miles Celic, Chief Executive Officer, TheCityUK, laid out the risk facing the UK, “One of the greatest risks for any successful financial centre is complacency. Europe is littered with cities that were once the leading international centre of their day. The last decade has been one of growth for our industry, yet global competitors have grown faster. However, with the right strategy in place and a clear focus on delivery, the UK can pull away once again from its competitors. It is an ambition that needs industry, government, and regulators to work together. It will take sustained focus, cooperation and determination.”

The lobby group calls for the UK to be positioned as a world leader in risk expertise and risk management.

TheCityUK stated that, “UK capital markets should be permitted to develop alternative risk transfer instruments such as catastrophe bonds, insurance-linked securities, and weather derivative contracts, attracting further capital to the London risk market.

“The UK should also press other countries to change any rules that limit international risk transfer. This will drive more insurance and reinsurance business into the global market.

“By spreading risk across borders, the market will become larger, more liquid and more resilient.”

Interestingly, the group highlights that the UK’s own regulatory environment has held back its ability to capitalise on the 2017 rule changes and hindered its goal of becoming a hub for ILS and alternative capital activity.

“The UK has itself imposed regulatory obstacles to new markets in alternative risk transfer. There is a growing global market in risk securitisation involving catastrophe bonds; insurance-linked securities and reinsurance sidecars; the trading of risk through industry loss warranties and weather derivative contracts; and the transforming of capital market risks into reinsurance through transformer vehicles.

“The UK has expanded its role in this area under the Risk Transformation Regulations 2017 but its regulatory authorities have proved reluctant to cater for the special purpose vehicles that would facilitate this development. The result has been a shift of mobile capital to overseas markets, notably Bermuda, with adverse effects on the London insurance market and also wider UK capital markets.”

In order for the UK to capture a growing share of the expanding global insurance and reinsurance market, TheCityUK believes that it needs to, “Work with regulators to support a flourishing insurance securitisation market, as intended under the Risk Transformation Regulations 2017.”

To facilitate this opportunity, they call for the UK government to, “Adjust the UK regulatory regime to facilitate the rise of insurance-linked securities.”

This echoes the calls of many in the ILS and reinsurance industry that have been calling for the regulatory environment to be made easier for ILS vehicle applications, management and transacting.

Speed to market is also now increasingly critical in ILS and the UK languishes far behind most of the other domiciles and the UK has work to do there as well.