The Regulations that will form the basis of the UK’s insurance linked securities (ILS) regime have been approved by a Parliamentary Committee, and are expected to become law shortly. The Risk Transformation Regulations 2017 and Risk Transformation (Tax) Regulations 2017 will form the basis of the new regulatory regime enabling the issue of ILS and other instruments in the UK, which may be issued as early as 1 January 2018.
There has been a boom in the ILS market since the early 2000s and the approval of the legal and regulatory framework sets the stage for the UK to join. ILS vehicles are used by insurers/reinsurers to transfer risks to capital market participants. Investors are attracted by the perceived high rates of return offered by ILS and low correlation with the risks of other financial markets. From the perspective of insurers, issuing ILS allows them to transfer risk to a broad range of investors.
To date, jurisdictions such as Bermuda and the Cayman Islands have dominated as the issuers of ILS, with Singapore announcing last month that it would fund the costs of issuing catastrophe bonds out of Singapore in a bid to attract ILS business. In this increasingly competitive environment, there are concerns that the process of obtaining regulatory approval of new ILS vehicles in the UK could prove an impediment to the growth of the ILS market in London. For further details of the background, see our previous articles1.
Nonetheless, this development has been positively received by the market, as the culmination of several years of consultation between the government, the regulators and insurers. Aside from the clear benefits to insurers, the introduction of the ILS framework is an increasingly important way of attracting new insurance business to London in the lead up to Brexit.