UK aims to become global hub for insurance linked securities

The UK government is aiming for London to capture a major share of the fast-growing insurance linked securities (ILS) market, by overriding the regulator and establishing a competitive regulatory and tax regime.

ILS enable insurance and reinsurance companies to transfer risk to the capital markets, so that risk can be efficiently managed for businesses and consumers. Also known as catastrophe bonds, the securities are typically used to insure against extreme risks, such as earthquakes and hurricanes. They appeal particularly to investors willing to accept a higher degree of risk for potentially higher returns.

The ILS market has seen more than US$80bn of issues to date, of which more than $10bn were in the first months of 2017, and is continuing to grow rapidly. It has largely been centred in offshore locations such as Bermuda and the Cayman Islands.

London has largely missed out, due to an absence of regulations that would allow ILSs to be issued in the UK. Insurers and reinsurers feared that planned regulation of the market from the Prudential Regulation Authority (PRA) would maintain this situation.

The PRA had wanted to approve each new ILS instrument before issue, while insurers countered that such an approach would be too protracted and deter investors. “It would have been an example of ‘gold-plating’ which would have killed the market,” says Malcolm Newman, chairman of the ILS taskforce at the London Market Group (LMG), an industry association.

However, the UK government has stepped in and forced the PRA to back down. The regulator will no longer have to be notified until after each new security is issued. “We pointed out [to the government] that the London market could potentially be adversely affected by Brexit,” said Newman. “To increase the range of products is a good protective move.”

“The new ILS framework offers a very exciting future for the London Market to continue to deliver innovative new products that make a real difference.”
The new regulations, issued by the Treasury on 20 July, introduce a competitive regulatory and tax regime for ILS to attract more of the business to the UK. They set out how to establish special vehicles to issue ILS, the legal framework and the associated tax treatment. The regulations also provide for “a tailored and proportionate approach to authorisation and supervision”.

The government said that it was giving the insurance and reinsurance industry greater certainty in how the new regime will work, enabling them to prepare ahead of the new rules when they come into force in this autumn.

“This new bespoke regime for ILS will ensure the UK remains the most competitive insurance and reinsurance hub in the world,” said Stephen Barclay, economic secretary to the Treasury. “This global business is evolving rapidly and we are determined to make sure we’re part of this evolution.

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Tags: Brexit | London | regulation | UK