UK's insurance linked securities framework set to be in force by year end

The regulations are now final subject to their passage through parliament, which implies that the UK's ILS regime will be in force in time for the 2018 renewal season.

The London Market Group (LMG) said that it was "delighted" that the regulations had been introduced to parliament, and that it hoped that they would be "debated and approved" in the next few weeks.

The global ILS market could be worth as much as $87 billion by 2019, according to research previously cited by the UK Treasury.

ILS, or 'catastrophe bonds' as they are sometimes known, offer insurers an alternative to traditional reinsurance as a form of risk mitigation. An ILS arrangement enables an insurer to transfer large and complex risks, such as catastrophic risks arising from natural disasters, to the capital markets rather than 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 draft proposals in November 2016. The Risk Transformation Regulations set out how to establish the new insurance special purpose vehicles (ISPVs) which will be used to issue ILS and provide for a "tailored and proportionate" approach to authorisation and supervision, while the Risk Transformation (Tax) Regulations set out the associated tax regime.

Once the regulations are in force, providers will be able to carry out a new regulated activity of insurance risk transformation through a type of 'protected cell company' (PCC) corporate structure, which will make it administratively efficient to manage multiple deals through a single ISPV. PCCs are already recognised by English law, and the arrangement will also allow the ISPV to strictly segregate its assets and liabilities in order to comply with the EU's Solvency II regulatory framework.

PCCs created under the new regime will be private companies limited by shares, only registered with the Financial Conduct Authority (FCA) rather than Companies House. The PCC directors will have the same duties as directors of conventional companies incorporated under the 2006 Companies Act, with appropriate modifications. The PCC will be able to issue non-voting equity and debt securities on behalf of its cells in order to fund the insurance risks that those cells take on.

Insurance expert Nick Bradley of Pinsent Masons, the law firm behind Out-Law.com, said previously that creation of the new regime was "vital" if the London market was to "retain its place as a global hub" for reinsurance activity.

"It will be exciting to see the UK, and London in particular, take its place in this market," he said.