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In Full: ‘Devil is in the detail’ for London’s ILS plans

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    • Law

George Osborne's plans to aid the development of London as a centre for insurance-linked securities (ILS) business must address specific issues such as the time needed to set up new vehicles, industry experts have said...


George Osborne's plans to aid the development of London as a centre for insurance-linked securities (ILS) business must address specific issues such as the time needed to set up new vehicles, industry experts have said.


In the 2015 budget statement last week (18 March), the Chancellor of the Exchequer said that his government would work with the industry and regulators to develop competitive corporate and tax structures to encourage ILS business to come to the UK.


"Clearly the growth of the ILS market has been one of the standout trends in the industry over the last 10 years, and so such a high-level policy announcement is in some ways not surprising," commented Colin Scagell, partner at law firm Mayer Brown.


"What everyone will need to see is the detail, and the devil is always in the detail."


Although the UK already has legislation in place to deal with insurance special purpose vehicles (ISPVs), Scagell said that any new regulatory framework would have to be proportionate.


Currently, Leadenhall Capital Partners, Securis and Coriolis are all based in London.


"The key to attracting the ILS market is to encourage policymakers, the regulators and industry representatives to work together to produce an efficient and effective framework of rules and guidance that strikes the right balance," Scagell explained.


He noted that Bermuda continued to be the market leader for ILS, largely due to a combination of existing infrastructure, speed to market and investor familiarity.


"[Bermuda] got investors comfortable about how it was going to navigate the balance between a secure regulatory framework, and a swift and efficient process," said Scagell.


Ratings agency Fitch said that the impact of the UK plan could vary between reinsurers, depending on where their existing business was focused.


"Companies underwriting lines of business that compete more directly with ILS products could find it harder to grow or maintain their market share, even if the reforms were successful in attracting additional reinsurance business to London," it said.


Fitch added that London's tax rules may not be as attractive as those in Bermuda, the Cayman Islands or Guernsey, which could be a problem.


However, James McPherson, partner at PwC, commented: "I think tax is less of a problem when compared to the speed of setting up. Tax is a consideration, but there is still a lot of business done in London.


"In the UK, you need to get regulatory approval, and it can take months. You can't operate with an unknown and lengthy lead time with these types of structures."


Last week (20 March), the UK Prudential Regulation Authority also gave the sector more certainty by stating that it planned to apply the EU's Solvency II regulations for special purpose vehicles, rather than maintain a separate set of rules equivalent to them.


"As a result, the PRA does not consider that the adoption of its proposals will create level playing field issues with regimes in other member states," the regulator stated.



Bermuda vs the UK


The budget announcement proposes bringing ILS business to the UK and injecting capital into London's economy in a similar method to that used on established ILS domicile Bermuda.


Registration and annual fees from the special purpose insurers (SPI) operating on the island provide regular income.


As of January 2015, a $6,180 fee is charged for each SPI registration, according to the Bermuda Monetary Authority (BMA) - the integrated regulator of the island's financial services sector.


An annual fee of the same amount is paid for the SPI every year afterwards.


The authority established a regulatory framework to accommodate SPIs in 2009. Since then, 137 SPIs have been registered.


The current registration fees are 48 percent less than those charged before April 2012. Previously, the cost was $11,600 per registration.


Over the past two years, Bermuda has earned $474,000 in registration fees, having registered 79 SPIs in the same period.


However, registrations on the island nearly halved last year, with 28 SPIs licenced compared to 51 the previous year, according to annual registration statistics.


Four SPI registrations in Bermuda have been completed so far in 2015.


One source said that establishing the SPI class involved a lengthy application process. However, a decision on the request can take only a week, with the BMA producing a verdict by Friday if an application is made on a Monday.


He added that less than 200 members of staff working in a variety of roles are required to work on the application.


SPIs are often used to issue catastrophe bonds. Nine bonds were issued in the final quarter of 2014, totalling $2.2bn.


At the end of last year, the global stock of ILS rose to $25.2bn on the Bermuda Stock Exchange, with Bermuda-issued ILS representing 60 percent or $15.1bn of that total.



How SPI registrations work 


An SPI assumes insurance or reinsurance risks and funds its exposure typically through debt issuance

The SPI application process states that an application should be submitted to the BMA's assessment and licensing committee
A completed SPI checklist, draft copies of private placement memos and any other relevant information to support the application should be included

A minimum of 15 copies of the completed application should be submitted

The BMA must receive applications by 5:00pm on Monday to be considered on the Friday of the same week


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