PRA looks to evolve UK ILS regime, after challenging start: Sweeney

The UK’s top regulator recognises that the insurance-linked securities (ILS) regime in the country has faced challenges since its launch and wants to evolve the system to make for swifter and easier issuance conditions, to attract more ILS and catastrophe bond activity to be transacted there.

This is according to senior executives of the United Kingdom’s Prudential Regulatory Authority (PRA), part of the Bank of England, who spoke before a House of Lords select committee last week.

The hearing was the latest in the series of House of Lords committee hearings on regulation and its effects on the competitiveness of the London insurance and reinsurance market.

It wasn’t long in the proceedings before the UK’s insurance-linked securities (ILS) regulatory and legal regime was brought up, as members of the House of Lords enquired why it was failing to gain significant traction so far.

Sam Woods, Deputy Governor for Prudential Regulation and Chief Executive Officer of the Prudential Regulation Authority and Anna Sweeney, Executive Director of Risk, Operations, and General Insurance, were both in attendance to give the regulator’s view on the impacts of its work on London’s competitiveness in the global insurance and reinsurance sectors.

Sweeney explained that one of the biggest questions the regulator gets is related to speed-to-market and this goes for traditional insurance and reinsurance company start-ups, as well as establishing ILS structures in the UK.

“One of the biggest areas of questions that we get from the market is about how responsive we can be to new entrants, in particular in this market because of the need to respond quickly to price changes,” Sweeney said. “Being able to set up a new firm or a new ILS structure on the back of the way that price movements have happened across the wholesale market is an essential way of the market reacting, and we want to be helpful in that.”

She moved on to discuss how the UK’s ILS regulations have been adopted to-date, saying, “We, alongside industry and the government, invested time and effort in setting up the ILS regime and there have been a number of issuances, seven approvals and eleven issuances, but that’s clearly less than other jurisdictions and less than we’d like.”

“Given that the regime has been in operation for a number of years, we’ve been talking to industry and thinking about how we can learn from what’s happened and indeed what’s not happened over the period.

“I think it’s very clear that the concerns essentially are about the speed of review and the ability to respond to rapidly changing markets and bringing capital at those points,” Sweeney continued.

Sweeney said that when it comes to ILS transaction the contract is where the regulator focuses, as “the effectiveness of the protection that’s given through those transactions is based on the effectiveness of that contract.”

As well as the focus on the contract, which can be lengthy for ILS issuances, Sweeney also said that the UK’s ILS regime has seen some complex transactions, which have made the regulators response a little slower as a result.

Saying that, “So the ability for both the industry and for us to turn this into a thriving regime has been a little challenged through that.”

The regulator is responding to this though, with ongoing industry engagements seeking to speed up processes and deliver the type of ILS regulations that insurance, reinsurance and investor participants really want.

“I think we’ve learned a lot through those contractual reviews and we are now looking to evolve our approach and processes, in particular I think for the most wholesale, short-tail general insurance transactions,”Sweeney said.

Adding that, We’re looking to continue those discussions with industry over the immediate period and make any amendments public as soon as we’re in a position to.”

Woods was asked whether, due to challenges faced and the way the ILS regulations have been received by the industry, the UK is a closed door for ILS, compared to other jurisdictions.

He said that, “I would say it’s not a wholly accurate description, but there is something in it in the sense that we’ve authorised seven, we haven’t had any withdraw, but are people really bringing things forwards, do they perceive that we’re open.

“We think we are, but there may be more to get that message out.”

Woods went on to highlight the ILS grant scheme in Singapore as a driver for that domicile having more success than the UK, when it comes to attracting ILS issuances.

Singapore has authorised thirteen ILS structures to-date, Woods said, more than the UK despite the UK’s regulations having been ready earlier.

“But there’s another quite big difference. My understanding is that at the moment if you apply in Singapore, the fees, all your advisors fees for lawyers, structures and all that, it all gets paid for out of a fund run by the MAS,” Woods said.

Adding that, in the UK, “We don’t have such a fund for advisors fees. For me that would seem like an inappropriate thing to do in the London market, it obviously must make sense in Singapore, but I’d imagine that has an effect and I thought worth highlighting.”

It’s encouraging to hear the regulator discuss the challenges faced by the UK’s ILS regulatory regime and that they are responding to them, importantly with the industry’s help.

Also read: UK ILS regulatory framework progressing through House of Lords.