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New ILS regulations in London market draw interest

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A U.K. parliamentary committee has approved a new set of financial regulations aimed at making the London market a center for insurance-linked securities activity, and regulators are seeing cautious industry interest.

The Risk Transformation Regulations 2017 and the Risk Transformation (Tax) Regulations 2017 approved by the committee last week are the result of a two-year effort between regulators and the market to help make London more competitive for ILS business.

At the introduction of Britain’s 2015 budget on July 8, 2015, the government announced it would “work with the London market and the U.K.’s regulators to develop a new and competitive tax and regulatory framework, consistent with the Solvency II Directive, to facilitate the domiciling of Insurance Linked Securities (ILS) vehicles — or Insurance Special Purpose Vehicles (ISPVs) — in the U.K.,” according to the July 2017 HM Treasury document, Regulations Implementing a New Regulatory and Tax Framework for Insurance Linked Securities: Response to the Consultation.

“The government believes that, with the right framework, the U.K. can make a major contribution to the continued growth and development of the global ILS market,” stated the Treasury paper. “London is the largest global hub for commercial and specialty insurance and reinsurance risks and can offer an unmatched cluster of specialist insurance and capital markets expertise.”

The London Market Group then established the ILS Taskforce, a group of industry practitioners with expertise in specialist reinsurance and alternative risk transfer business to work with Treasury on the new regulations, according to the document.

The consultative process was noted by one market member.

“The U.K. ILS Regime has been carefully designed thanks to an inclusive consultation process and is efficiently designed to facilitate ILS transactions for the benefit of cedents and investors alike,” said Quentin Perrot, vice president of capital markets and advisory for Willis Towers Watson P.L.C. in London.

Treasury’s view that London’s role as an insurance hub will aid ILS growth also struck a chord with observers.

“ILS investors used to operating in jurisdictions such as Bermuda will need to get to grips with what London has to offer,” William Hogarth, legal director at Clyde & Co L.L.P. in London, said in a statement.

“ILS have been gaining popularity over the last two decades, and growth is set to continue. The strength of London's reputation will serve as an advantage given recent disclosures around offshore tax havens, some of which have already become established ILS centers,” Mr. Hogarth said in his statement.

Though just passed, the new regulations are already drawing some positive response.

“Thus far we have seen a cautiously positive response from the local (insurance and reinsurance) industry,” Mr. Perrot said. “Many players are eager to test this new regime to bring innovative products to the market, and the next few months should prove interesting.”