The global stock of insurance linked securities at the end of 2014 was approaching $25.2 billion. Yesterday George Osborne unleashed the giant peach for the United Kingdom in a seemingly measured statement but one full of promises.
“2.228 Global reinsurance – the government announced at Autumn Statement 2014 that it would explore options to attract more reinsurance business to the UK. To take this forward, building upon the UK’s position as a world leader in the global insurance market, the government will work with the industry and regulators to develop a new competitive corporate and tax structure for allowing Insurance Linked Securities to be domiciled in the UK. This alternative form of reinsurance makes greater use of capital markets and is a key growth opportunity for the sector.” [Budget Documents 2015]
Michael Wade of the Cabinet Office welcomed the announcement reminding us that London has been “the base for intelligent capital and risk origination”.
Pension funds and other investors have flocked to Insurance Linked Securities as rock bottom interest rates have depressed bond yields. The insurance players in these deals have seen ILS as a growing supply of capital and risk protection.
The intention is to create and develop a corporate and tax structure that allows for insurance linked securities such as catastrophe bonds to be domiciled locally in the UK. Osborne no doubt sees the significant revenue streams enjoyed by jurisdictions such as Guernsey, Bermuda and Caymans might also be enjoyed in the UK market.
As the Chancellor rose to speak in Parliament, not far away at the same time in the British Museum, the Guernsey International Finance Centre was showcasing its wares to several hundred ILS delegates: boasting a regulator “that understands the industry and can offer pragmatic oversight and speedy approvals. This is one reason why Guernsey have gained the “lions share” of the market.
It will be interesting to see if Osborne can take back some of the peach from the other markets.
We advised our clients as early as March 2011 that there was a convergence of features in the UK market making it an attractive domicile. The seed came in the form of the Taxation of Insurance Securitisation Companies Regulations 2007 (SI 2007/3402) and the EU Reinsurance Directive starting the process of encouraging a tax neutral environment and regulatory clarity in the UK.
For some time we have not understood the under-utilisation of the UK except for custom and practice. Current expectation (following yesterday’s announcement) is that we will see the introduction of “protected cell structures” as a way of ring fencing the collateral so crucial for ILS. Measures might also include allowing cat bond investors to avoid paying tax until the instruments mature; and speedier approvals of applications of ILS structures.
Perhaps George’s “approval” of the market will lead to greater enthusiasm from participants to try something new.