Captive Insurance – UK government sets out new ILS framework

The UK Treasury has published new rules for insurance-linked securities (ILS) as the country aims to grab a share of the rapidly growing market.

The rules, published on 20 July, allow for insurance and reinsurance firms to transfer risk to the capital markets, meaning that risk can be managed more effectively for businesses and consumers.

The regulations will be presented to Parliament after the summer months, ready for final implementation later this year.

The introduction of ILS legislation was delayed after UK Prime Minister Theresa May called for the snap general election that was held on 8 June.

Over the past 18 months, the Treasury has worked with the Prudential Regulation Authority, the Financial Conduct Authority and the London Market Group’s ILS taskforce to develop regulations that will implement a new ILS regime in the UK.

Following the government’s initial consultation on ILS, the second consultation, published in November last year, proposed to create a protected cell company (PCC) regime for multi-arrangement insurance special purpose vehicles (ISPVs).

The consultation said that multi-agreement ISPVs are permitted under Solvency II, however, the core requirements of the directive “will apply in respect of each individual contractual arrangement”.

It stated: “The proposed UK PCC regime is designed to meet these Solvency II requirements through a strict segregation of risk transfer contracts, therefore providing confidence to cedants and investors that deals will be robustly segregated. It will also provide an administratively efficient means for managing multiple deals from one ISPV.”

According to the government, PCCs introduced under the Risk Transformation Regulations will only be available for use as authorised ISPVs.

Some consultation responses argued that a protected cell regime would “add value” across a range of financial services activities. Respondents also suggested that PCCs should be available as a corporate structure for other regulated activities.

But the government said it will keep the potential broader use of PCCs “under review, but will not extend the purpose of PCCs at this stage”.

In terms of taxation, the government proposes to implement a bespoke tax regime.

This will involve exempting the insurance risk transformation of ISPVs from corporation tax, a complete withholding tax exemption for foreign investors, and UK investors being taxed as normal according to their facts and circumstances.

The government said its aim is to “create a regime that is internationally competitive and in line with the UK’s move towards a territorial tax system”.

Stephen Barclay, economic secretary to the Treasury, said: “This new bespoke regime for insurance-linked securities will ensure the UK remains the most competitive insurance and reinsurance hub in the world. This global business is evolving rapidly and we are determined to make sure we’re part of this evolution.”

Also commenting on the regulations, Malcolm Newman, chairman on the London Market Group’s ILS taskforce, added: “The new ILS framework offers a very exciting future for the London Market to continue to deliver innovative new products that make a real difference. I am proud that the LMG has helped lead the development of these proposals.”

“We believe there is a real appetite in the London Market to invest in ILS products, which will bring investors to the UK and make a significant contribution to growing the UK’s trade.”

Source: captiveinsurancetimes.com