What are the next steps before final implementation of the ILS framework in the UK?
The rules were published on the UK’s Treasury website on 20 July and have been lodged in Parliament. The rules will now have to go through the parliamentary process, which means after the summer recess it will be on the agenda aiming for completion by the end of October, at which point the insurance-linked securities (ILS) legislation should be signed into law. We don’t expect any contention because it had cross-party support before it has even reached Parliament. Therefore, it should be a straightforward process going through all the steps necessary.
From that point at the end of October, the ILS legislation will be live and people can start taking advantage of it. Sometime between now and then the Prudential Regulation Authority (PRA) and the Financial Conduct Authority (FCA) will publish their updated regulations, which will be available towards the end of the summer.
After working with the UK Treasury, the Prudential Regulation Authority and the Financial Conduct Authority over the last 18 months, are you happy with the published rules?
In many respects we got more than we expected, in terms of the tax positions of the vehicles, but in the same light we expected more. We have been working with the Treasury to work out how much primary legislation we need to change, because the more you have to change the longer the process.
We struck a balance between what we need to enter the market and what optimally we would like, with a view that the Treasury will come back and enhance the regulations over time. At the moment we are very pleased with the outcome.
Who will benefit from the new ILS regulation in London? And how do you think it will change London’s insurance market?
Already there are active ILS players in London, using vehicles in other jurisdictions, but those players will have an option of locating all their activities in one place or to have vehicles in more than one place. We predict that they will likely be the first movers that will start to transact business onshore in the UK.
We also believe there will be other entrants from the Lloyd’s market, because of the way that some of the special purpose syndicates have been formed. They might start forming some ILS special purpose vehicles and we hope that Lloyd’s will take advantage of this opportunity. In addition, we might see some completely new entrants, people who are interested in going into this field but don’t want to be in offshore jurisdictions.
We see this as a means of protecting London as a centre for insurance. ILS is increasingly developing and is developing elsewhere, so we need that to be onshore. It is a protective measure for London’s intellectual capital.
We also see that London has got the ability to innovate in this area more than some other locations and so we will expect to see some new creative use of these instruments within the London insurance market that should hopefully attract more activity here.
Were the rules modelled on Bermuda and Guernsey?
We looked at the rules from both domiciles, as well as those in Malta and Gibraltar. We then analysed those rules and looked at the bits that we wanted and developed our own regime. The UK’s regime is different to those in Bermuda and Guernsey, and hopefully more flexible.
The ‘first’ blockchain ILS deal was completed recently. Do you think this type of settlement will continue and eventually replace the traditional system?
It is very exciting to see a blockchain deal completed through ILS, although it was a shame it wasn’t in London. That is the type of thing that we think London could bring to the ILS community. I would expect to see people watching it closely. If the deal succeeds and is at a lower cost then it could well push others to go down that route.
Will it completely replace the traditional system? No, I don’t think so. Blockchain is an unproven technology. People are trying to find uses for it and make it work but it does have some practical challenges. If the deal is successful then we will certainly see more of the same kind.