The United Kingdom’s Prudential Regulatory Authority (PRA), which is part of the Bank of England, said that it recognises the need to improve the country’s authorisation process for insurance-linked securities (ILS) vehicles, noting that time taken is a factor.
In a letter to insurance and reinsurance CEO’s, Anna Sweeney and Charlotte Gerken, two Executive Directors for Insurance Supervision, laid out the regulators priorities for 2022 and ILS got a small, but perhaps meaningful, mention.
The UK’s Risk Transformation Regulations were launched in 2017 and set out the rules to govern ILS issuances and the necessary insurance special purpose vehicles (iSPV’s), that can be used for entering into transactions including catastrophe bonds and collateralised reinsurance arrangements.
Very quickly after the UK’s ILS regulatory regime launched, it became apparent that speed to market was a concern and a very real issue for those seeking to set up new ILS or catastrophe bond issuance vehicles in the country.
Part of this was the turnaround time of regulators including the PRA when it came to authorising ILS structures and plans.
But since the launch of the ILS regulatory regime and the publication of ILS legislation, any focus on enhancing this has largely been placed on cost, including recent tax changes.
It’s vital to level the playing-field on issues such as tax, as seen in the recent work to exempt insurance-linked securities (ILS) from Stamp Duty related taxation.
But, perhaps more important, is making the UK’s ILS market as quick and easy to use as leading domiciles such as Bermuda, where today you can get an SPI structure approved for simple catastrophe bond issuance in as little as three days.
So, those parties interested in seeing the United Kingdom develop a robust and leading insurance-linked securities (ILS) market will be pleased to see the mention in this “Dear CEO’s” letter from regulator the PRA.
The letter states, among the PRA’s stated priorities for 2022, “We are also continuing to explore ways to improve our approach to authorising ILS vehicles and other wholesale insurance firms to ensure the process and time taken are proportionate to the risks.”
That seems a clear admission that speed to market is an issue when it comes to the authorisation of ILS vehicles in the UK.
This will be welcomed, as it’s a significant factor for sponsors of catastrophe bonds and other structures that might like to use the UK as their domicile for insurance-linked securities (ILS) issuance.
Sponsors of ILS, cat bond, or other collateralised reinsurance arrangement, that are lined up as part of a renewal of reinsurance or retrocession, need to know they can get transactions effected quickly and for some the strategy is to choose capital sources once they have a clearer idea of pricing in traditional and alternative markets, meaning speed is of the essence.
Sponsors don’t want to go through a lengthy registration and authorisation process when they are trying to be tactical in their reinsurance buying.
Neither do they want to have to register and authorise a structure when they could just elect to place the risk in traditional markets instead.
The time to get an ILS to market in the UK currently means that only sponsors who are totally committed to the UK are likely to proceed with an issuance there, given the slower process compared to other ILS marketplaces.
There aren’t any further details provided, but the PRA executives did say that any new regulatory changes will be introduced with an appropriate period of notice and transitional measures where necessary, so the market will have a chance to review them before implementation.
Speeding up ILS issuance could be the key to unlocking more ILS market activity in the UK. This seems to be on the agenda for 2022, so we’ll keep you posted should anything more concrete emerge in the way of plans to speed the regulatory process.