London as an ILS domicile creates ample possibilities
Over the past decade, insurance-linked securities (ILS) have been for the most part domiciled in Bermuda or the Cayman Islands. The drivers for using these offshore locations were simple: ease of execution, predictable regulation and taxation.
As far back as 2014, many argued that if London created a regime that addressed these same basic issues, the City could become the natural global hub for ILS, collateralised reinsurance contacts and sidecars in particular.
If only it were that simple. Among the missing ingredients in London were the lack of a legal corporate structure similar to that of the class 3 Bermudian reinsurance vehicles which enabled a form of regulated holding company, but which also created protected cells in order to transact risk transfer between counterparties (usually reinsurers to capital markets). Crucial to this structure was the absolute financial independence of each cell, albeit managed by the same entity.
While the cell was operating, there needed to be a zero-tax environment so that assets and liabilities were treated as being gross for as long as the contract remained current. Taxation would become applicable only at the conclusion of the cell activity.
Also missing was a regulatory framework that was of the highest standard, but not such that it arrested its use due to overzealous restrictions or culture.
After a long process of drafting and designing and drafting again, legislation known as the Risk Transformation Regulations (2017), embracing the complete package approved by the UK parliament, ministers, tax authority and regulators, was passed in November 2017.
In broad terms the new ILS framework is similar to that of the Bermudian and Cayman Island structures. Indeed, in some ways there may even be advantages depending upon the type of contract and domicile of counterparties.
First out of the gate was Neon Capital, with its NCM Re vehicle which raised $72 million of capital just before year-end 2017 as a collateralised quota share of its Lloyd’s syndicate 2468 to write property treaty D&F portfolios.
What can we look forward to now the new legislation is in place and contracts are being executed?
To start with, London as an ILS domicile should not be thought of as a ‘raid’ on other jurisdictions, but as a healthy addition to the global hubs of ILS business and trading. It also provides the industry with a mainstream ‘onshore’ location. Moreover, London as an ILS hub may hasten still sceptical investors and risk transfer executors to consider ILS as being permanent and mainstream as well.
