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The UK Ensures Its Share of Insurance-Linked Securities Market

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December 01, 2017

On November 29, 2017, the UK government allowed insurance-linked securities (ILS) regulations to pass. The regulations introduce a competitive regulatory and tax regime for ILS, which will ensure that the United Kingdom gets a share of this rapidly growing market.

ILS allow insurance and reinsurance firms to transfer risk to the capital markets, meaning that risk can be managed more effectively for businesses and consumers. Sometimes known as catastrophe bonds, ILS are normally used to insure against extreme risks, such as earthquakes and hurricanes.

In a November 7, 2017, statement, Lord Young of Cookham said, "As of 2017, more than $90 billion-worth of insurance-linked securities have been issued. Indeed, 2017 has seen a record issuance of insurance-linked securities, with more than $11 billion issued this year alone. EY has estimated that the market could grow to $224 billion by 2021."

The regulations set out how to establish special vehicles to issue ILS, the legal framework for ILS, and the associated tax treatment. The regulations also provide for a tailored and proportionate approach to authorization and supervision.

Economic Secretary to the Treasury Stephen Barclay said, "This new bespoke regime for [ILS] will ensure the UK remains the most competitive insurance and reinsurance hub in the world."

Malcolm Newman, managing director of SCOR's Europe, Middle East, and Africa Hub and chairman of London Market Group's ILS Taskforce, commented, "Undoubtedly the regulations will evolve over time as the ILS market itself evolves, and we are encouraged by the Prudential Regulation Authority's (PRA) willingness to engage in pre-application dialogue with parties interested in using the new regulations. This dialogue should minimize any issues applicants may have with the regulations."

Mr. Newman continued, "The taskforce has consistently said that it seeks to grow the ILS pie. What the recent natural catastrophes across the US, Caribbean and Mexico have demonstrated very clearly is the extent of under insurance, even in developed countries. As an industry we need to be more vocal about the social good of insurance, demonstrating the resilience and critical support an insurance policy gives to its holder in the event of a disaster. Through doing this the pie will grow and there will be opportunities for London Market players to generate growth via both traditional cover and new ILS solutions."

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