London meets the ILS challenge
London is now a centre for insurance-lined securities (ILS) business. While London has always played a role in ILS since its inception over 20 years ago, now the city can host ILS structures. Entire deals can be transacted in the UK.
There were three primary hurdles that proponents of London as an ILS centre had to overcome.
The first was the fiscal system. Bermuda and other offshore locations offered advantageous tax regimes with which London could not compete. Special purpose vehicles in those jurisdictions did not attract corporation tax whereas, although insurance special purpose vehicles (ISPVs) had been available in the UK for many years, the deduction of corporation tax from their profits made their use uneconomic. This disadvantage has now been cured.
The second issue was the corporate structures available to those creating ILS deals. While ISPVs had been permitted for a while, more flexible structures such as protected cell captives existed in other jurisdictions allowing deals to be conceived, structured and closed more swiftly. The UK has now created protected cell companies (PCCs) to resolve this.
The final hurdle was regulatory. Deals can be brought to market very swiftly in jurisdictions such as Bermuda and the Cayman Islands. A question existed as to whether the UK could respond. The answer came from the Prudential Regulation Authority (PRA) which committed to a maximum time for the approval of ILS mechanisms of six months but also stated that it would aim for a turnaround period of six to eight weeks for uncomplicated transactions, particularly where dialogue was commenced at a very early stage.
This timeframe is not as swift as some offshore jurisdictions but does show a recognition of an important issue by the PRA and commitment to tackle it.
With these structures and commitments in place, the question becomes whether people will use the facilities afforded by London or whether they will continue to favour tried and tested jurisdictions.
Encouraging signs
Deals have been done. This is very encouraging as it has shown not only that the structures are in place but that they work and people are willing to use them. The PRA has dedicated a team to dealing with the authorisation of vehicles. There is certainly commitment.
Whether this commitment will extend beyond a few London-centric transactions and create an international ILS market place remains to be seen. There are, however, a number of aspects to doing business in London that will make it attractive.
Despite the fiscal arrangements in place for ILS, London is not seen as an offshore location. Accordingly, companies who might shy away from involvement in jurisdictions which are perceived as used, to some extent, by those with less interest in transparency and fiscal responsibility than they ought to have, can rely upon the regulatory gold standard that London affords. This makes it more attractive to some entities, investors and governments who may wish to sponsor bonds.
London is home to capital as well as to professional expertise. Everything required to conclude a transaction is located within a short distance. It also has law, an arbitration infrastructure and courts which are well adapted to providing the legal certainty required in transactions.
