The recently launched UK ILS regime has to date facilitated two successful transactions. GC Securities’ managing director Des Potter, who played a lead role in the work to establish the regime as part of the London Market Group’s ILS Taskforce, discusses the potential it offers and what steps can be taken to build on the momentum generated
On 1 June, Scor announced that it had successfully sponsored a new catastrophe bond, Atlas Capital UK 2018, becoming the first reinsurer to capitalise on the UK’s recently implemented ILS regime. As sole structurer and bookrunner for the transaction, GC Securities were the first broker-dealer to successfully navigate the demands of the fledgling legislation.
The launch of the new regime is the culmination of over three years of collaboration between the (re)insurance industry, and in particular the London Market Group, the UK’s HM Treasury, the Prudential Regulation Authority (PRA) and the Financial Conduct Authority (FCA) to implement the legislation that will help position London as a hub for the ongoing development of the ILS market.
The ILS framework provides an excellent example of how an industry body, such as the London Market Group, can work collaboratively with Government to bring innovative and long-lasting benefits to the UK (re)insurance economy.
Coming into force in December 2017, the UK Risk Transformation Regulations 2017 have already enabled the authorisation of two insurance special purpose vehicles (ISPV) with over $350m of securities issued to support the transfer of risk to these vehicles.
The legislation is robust and the bespoke tax regime that allows the qualifying risk transformation vehicles to be exempt from corporation tax and the securities issued to be exempt from both withholding tax and stamp duty provides an internationally competitive framework.
From a regulatory perspective, its implementation has proved a steep learning curve, and the PRA has been extremely diligent with the application process. The body should be complemented on the resource levels deployed to assess applications and we must recognise the challenges involved in ensuring all components of the Solvency II regulations for ISPVs are fully satisfied as with each authorisation they are setting market precedents.
It is also important to understand the regulatory environment of each cedant, to enable them to obtain full capital credit for risks transferred to UK ISPVs (for example, Regulation 114 trust arrangements for US insurers).
The degree of diligence undertaken by the PRA requires patience on the part of the industry. Practitioners must work proactively with the body to aid their understanding and mitigate any concerns. Particularly with the three mandatory conditions regarding the contractual arrangements to transfer risk to an ISPV, namely (a) that the ISPV is at all times fully funded, (b) that the transfer of risk is effective in all circumstances and (c) that the claims of investors are at all times subordinated to the (re)insurance obligations of the ISPV.
A lot of effort has already been invested to develop the UK ILS framework and this is helping to generate a robust pipeline of new applications in which Guy Carpenter is actively involved. I firmly believe that the ILS regime provides a landmark opportunity to strengthen London’s influence in the global (re)insurance market and secure a strong position in this rapidly evolving and expanding sector.
Potential new investors and risk transfer counterparties must accept that the PRA will maintain rigorous application processes – this is not simply a case of “rubber stamping” applications. The market would expect London to operate to the highest standard. However, this needs to be a standard that is commercially competitive and leads to a growth in business and employment opportunities for the UK economy.