London’s road map to the ILS market

The Prudential Regulation Authority (PRA) has now published its Supervisory Statement entitled “Authorisation and supervision of insurance special purpose vehicles” which will be adopted once the Risk Transformation Regulations 2017 (RTR) have passed through Parliament.

The RTR are the rules under which insurance linked securities (ILS) will be brought to the UK and London will seek to compete with more established jurisdictions such as Bermuda and the Cayman Islands to host ILS deals. The Supervisory Statement sets out how the PRA and the Financial Conduct Authority will implement and oversee those rules.

There were a number of steps that had to be taken in order to establish London as an ILS centre.

The first was to enable the mechanisms necessary to allow ILS deals to be located in the city. This has been done by the RTR. Once the regulations are implemented, protected cell companies (PCCs) will be able to be formed in addition to the insurance special purpose vehicles (ISPVs) that have been permitted for some time. This structure will enable ILS deals to be centred in London.

Fiscal arrangements are also being prepared to allow London to compete with off-shore centres. PCCs and ISPVs in London will be treated in the same way for tax that similar entities in off-shore centres are with tax only being claimed from those that withdraw the profits rather than at source.

The RTR and the PRA’s Supervisory Statement seek to put the final piece of the jigsaw into place.

In jurisdictions such as Bermuda and the Cayman Islands, the time to market of deals is very swift. Those jurisdictions are keen to funnel business through their countries and make considerable effort to ensure that minimal delays are caused by the regulatory approval process. A question existed as to whether the PRA would be able to compete.

The PRA is known as a gold standard regulator. It has not, historically, been obliged to solicit business. Its interest has always been to ensure full and proper regulation. The process required to achieve this has sometimes appeared slow and laborious. It was not clear whether the processes and mindset within the PRA would be capable of adaption to create a framework that could compete with smaller jurisdictions and yet, at the same time, maintain the high standards that are expected from the PRA.

Timeframes

The RTR provides timeframes for the completion of regulatory approval that fell far outside the times that are achieved in off-shore jurisdictions. This six month period is, however, a maximum time for the approval of PCCs. The Supervisory Statement states that the PRA will seek to approve straightforward applications within 6-8 weeks. This is considerably better and while, longer than Bermuda or the Cayman Islands, certainly a more practical timeframe than many had feared.

The questions now is whether the UK can attract transactions that are currently going elsewhere. Many fund managers have tried and tested processes using other jurisdictions and may well consider that “if it ain’t broke; no need to fix it” mantra. Additionally, while the Supervisory Statement looks to a 6-8 week timeframe for approval for “straightforward” cases, it does not and probably cannot, define what will be straightforward. Additionally, the timeframe applies to cases where pre-approval submissions have been made, potentially extending the overall time. Certainly, the processes will take a little time to bed in and for a realistic picture of what is straightforward to emerge.

That said, the introduction of an ILS market in London comes at a good time when ILS looks set to develop beyond its focus on Gulf of Mexico windstorms and in the aftermath of the Panama Papers and Paradise Papers hacks which have made the use of off-shore centres less attractive to some.

The one challenge to the development of London comes from the announcement by the Singapore Monetary Authority that they will be creating an ILS centre in Singapore and will subsidise its development by covering all the transactional costs of deals based there. This development could take some of the shine off London, particularly as a centre for the development of ILS into the SE Asian markets.