The Insurance Law Committee of the City of London Law Society (the Committee) has published its response to HM Treasury’s latest consultation on the UK’s proposed insurance linked securities (ILS) regime. ILS offer (re)insurers a way to manage risk which is different to conventional reinsurance cover – (re)insurers effectively transfer the (re)insurance risk to the capital markets.
HM Treasury first consulted on a regulatory and tax framework for ILS business in the UK in early 2016. Following supportive responses to this consultation from (re)insurers and other stakeholders, late last year HM Treasury published drafts of the two statutory instruments which would implement the proposed ILS framework: the Risk Transformation Regulations 2017 and the Risk Transformation (Tax) Regulations 2017.
The Committee’s response to the consultation on these statutory instruments primarily concerns insolvency issues involving ILS. In particular, the Committee raised concerns in relation to two insolvency scenarios involving insurance special purpose vehicles (ISPVs) – the vehicles which assume (re)insurance risks), and suggested some measures which might assist in providing comfort to stakeholders.
The response also includes comments on how the regime would interact with existing financial services legislation and regulations, including Solvency II, the applicability of the insurance business transfer regime, and taxation.
The full text of the Committee’s response may be found here. It is understood that the Committee intends to respond separately to the Prudential Regulation Authority and the Financial Conduct Authority on their related consultation on the authorisation and supervision of ISPVs.
The regulators’ consultation is open until the end of February and no doubt the responses to both consultations will need to be considered and discussed by HM Treasury and the regulators before the draft statutory instruments are revised to take into account feedback from the consultations. With this in mind, it seems likely that it will be some months before amended versions of the statutory instruments are put before Parliament.