MPs approve new UK insurance linked securities framework

The Risk Transformation Regulations and Risk Transformation (Tax) Regulations will now become law in the coming days, opening UK the possibility for the first UK ILS to be created in 2018.

"Despite the period of political uncertainty earlier this year which hampered progress, it is great to see the new UK ILS framework coming into being before the end of 2017," said insurance law expert Nick Bradley of Pinsent Masons, the law firm behind Out-Law.com. "Significant effort from various stakeholders would have been involved and is worth congratulating."

"We look forward to seeing what 2018 will bring in terms of the development and growth of the ILS hub in the UK," he said.

ILS, which include so-called 'catastrophe bonds', allow insurers an alternative to traditional reinsurance as a form of risk mitigation. They allow insurers to transfer large and complex risks, such as catastrophic risks arising from natural disasters, to the capital markets, rather than to a reinsurer. The UK government first announced its intention to develop a competitive corporate, tax and regulatory framework for ILS vehicles as part of the 2015 Budget, and began consulting on its draft proposals in November 2016.

Once in force, the regulations will create a new regulated activity of insurance risk transformation, with a bespoke authorisation and supervisory regime. They also introduce a new type of 'protected cell company' (PCC) corporate structure, which will make it administratively efficient to manage multiple deals through a single insurance special purpose vehicle (ISPV), and set out the rules for the issuance of securities by those PCCs.

The separate tax regulations set out the associated "competitive and straightforward" tax regime for ILS. Under the regulations, tax will be charged at the level of the investor rather than on the (ISPV). UK investors will be taxed as normal, according to their circumstances, while non-UK investors will be taxed according to the rules of their home jurisdiction.

The Prudential Regulation Authority (PRA) will lead the insurance risk transfer authorisation process, although Financial Conduct Authority (FCA) approval will also be required before finalisation. The PRA, which published its own final rules on ILS last month, expects to take a maximum of six months to authorise applications, but intends to allow prospective applicants to "discuss their proposals" before applying to address concerns over the potential for delays to the authorisation process.

Addressing a parliamentary committee set up to scrutinise delegated legislation, Treasury secretary Stephen Barclay described ILS as "an important and growing part of the global specialist reinsurance market".

"As of 2017, more than $90 billion worth of ILS have been issued," he said. "However, despite the importance of London as a global insurance hub, the rapid growth of the ILS market has taken place elsewhere."

"Members have heard that ILS are a growing market. Indeed, 2017 has seen record issuance of ILS with more than $11bn worth in this year alone. It is, therefore, the right time for the UK to improve its offer in this market," he said.