The UK government brought in new regulations last week creating a framework for Insurance Linked Securities (ILS) which it hopes will propel the UK insurance industry into a lucrative market – worth more than $80 billion to date.
A tax and regulatory framework was set out which the government hopes will secure a leading position for the country’s insurance market on the global stage. The new regulations create a bespoke regime that will allow insurers and reinsurers to transfer risk to capital markets through ILS, also known as catastrophe bonds. But what will the complex regulations actually achieve?
“The thinking behind it was that at the moment, the ILS market is predominantly an offshore market. If you look at where the vehicles are located… they tend to be in places like Bermuda, the Channel Islands, Cayman,” Martin Membery, partner in Sidley Austin’s insurance practice, told Insurance Business.
In developing a new, competitive framework for ILS in the UK, the government looked at what those other domiciles are doing well as part of its analysis. The result is, broadly, two major streams of change: one tax-related, and one to do with the corporate structures that can be used with these ILS deals, Membery explained.
The potential advantage to this – and what the government is hoping for – is that more underwriting will be physically located in the UK, which would drive revenue and help stimulate the economy.
Asked whether the regulation goes far enough, Membery broadly agrees, but notes that there are still a few points that need ironing out, even at this stage. Several issues raised by both the PRA and the FCA, which has launched its own consultations on how it will apply the regulations, are still awaiting further clarification.
But with all the grand hopes, it remains to be seen whether the new regulations will have the stimulative affect the government is hoping for.
“The wider question would be, just because the UK has then, on this assumption, set up a regime that is broadly equivalent to the one that exists in Bermuda or Guernsey from a tax and corporate structure perspective, does that suddenly mean that people will be looking to do their deals in the UK? That is a slightly more open question, and I think you will get slightly different responses according to who you talk to in the market,” Membery commented.
Many organisations will already have very well-developed infrastructures, with underwriting resources firmly established in offshore centres.
“Why would they suddenly opt to move to the UK unless there is a compelling reason to?” he questioned.
On the other hand, for many there will be an advantage, particularly some UK-centric firms which may have historically had to keep underwriting offshore, but could stand to benefit from “bringing everything under one roof,” and streamlining their corporate structures.
Others – and Membery says he knows of a few – may be looking to enter the ILS market for the first time.
“There’s a potential for new UK onshore ventures,” he said. “But what that actually means in terms of the number of new ventures here, or people moving existing businesses into the UK when they’ve actually been based elsewhere, I think is still quite an open question.”
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