The UK government has announced updates to its regulatory and tax regime for Insurance Linked Securities (ILS) as it seeks to ensure the re/insurance business environment remains competitive throughout the transition out of European Union membership.
The regulatory reforms cover how to set up an ILS vehicle, the associated taxation system and legal framework and outline the government’s approach to authorisation and supervision.
Economic Secretary to the Treasury, Stephen Barclay said; “This new bespoke regime for Insurance Linked Securities will ensure the UK remains the most competitive insurance and reinsurance hub in the world.
“This global business is evolving rapidly and we are determined to make sure we’re part of this evolution.”
The government’s proposal for ILS taxation includes insurance risk transformation activity of the Qualifying Transformer Vehicle (QTV) not being subject to corporation tax and investors being taxed as normal according to their facts and circumstances.
The treasury wrote; “During the consultation process it became clear that subjecting the core insurance risk transformation activity carried on by the QTV to corporation tax would result in an uncompetitive tax treatment.
“With such a tax treatment, ILS vehicles would be very unlikely to establish themselves in the UK, meaning the UK would lose out on the growing ILS market. Therefore, the government has decided that the insurance risk transformation activity of the QTV should not be subject to corporation tax.”
As it aims to create an internationally competitive regime that’s in line with a shift to a territorial tax system, the government has proposed UK investors would be taxed as normal on their investment income, and overseas investors taxed according to the regime in their home country.
With these upcoming changes, the government is hoping to offer the ILS sector and re/insurers the opportunity and certainty needed for the segment to expand and continue to flourish in The City.
Malcolm Newman, Chairman of the London Market Group’s ILS Taskforce, commented the regulatory update “offers a very exciting future for the London Market to continue to deliver innovative new products that make a real difference.
“We believe there is a real appetite in the London Market to invest in ILS products which will bring investors to the UK and make a significant contribution to growing the UK’s trade,” Newman added.
The regulations are set to be laid out in full before Parliament after summer recess ends on September 5th, and are expected to be implemented in force in autumn.
The new framework is a positive step forward for the UK ILS and reinsurance market, which stands to benefit from increased opportunities for ILS transactions and less bureaucracy surrounding setting up new ILS entities and vehicles, although questions regarding speed of approval and cost are yet to be answered and could make the difference in how much clout the changes will actually have.
For insurers and reinsurers, it offers more options for sponsors and investors and opens a window for London’s re/insurance expertise to be more readily used in collaboration with capital markets – resulting in a more innovative ILS space and competitive global market.
