UK PRA to consult on ISPV reforms, launch accelerated catastrophe bond pathway

The United Kingdom Bank of England’s Prudential Regulation Authority (PRA) expects to launch a consultation into its insurance special purpose vehicle (ISPV) regulatory regime, including introducing a new, accelerated pathway for catastrophe bond applications and a 10-day target for approvals.

The moves are designed to enhance the regulatory environment for use of ISPV’s for insurance-linked securities (ILS) and to encourage more catastrophe bond issuance in the UK.

Speaking at the Bank of America Securities Annual Financials CEO Conference, Shoib Khan of the PRA outlined how the PRA aims to take a differentiated supervisory approach for segments of the UK’s insurance market, while also announcing changes to be consulted on relating to the ISPV regime and catastrophe bonds.

Khan said, “Another area where the PRA is seeking to reform and improve efficiency of is the UK ISPV regime, along with necessary changes to PRA rules and legislation. The PRA expects to consult on a package of reforms to the UK ISPV regime in coming months.”

Detailing some of the ISPV changes to be consulted on, Khan said that the goal is to allow for a wider range of transaction structures in the UK regime, which is positive for the continued development of the UK’s insurance-linked securities (ILS) regulatory framework.

Key to this will be also implementing a streamlined approach to speed up the application and approval processes, with a goal of reducing costs for applicants.

In addition, Khan said that the consultation will look to clarify the PRA’s expectations of UK insurers who cede risks to ISPVs, wherever they are established.

On catastrophe bonds specifically, the UK is keen to encourage more activity to the country.

Khan said, “Alongside these reforms, I can share with you that we intend to consult later this year on introducing a new, accelerated pathway for catastrophe bond applications. Commonly known as ‘cat bonds’, these vehicles have been effective in transferring insurance risks into capital markets for several years, and benefit from high levels of standardisation.

“In collaboration with the FCA, we plan to share information on how we will review complete applications within 10 working days rather than our current 4–6-week process. We will share more information on the proposal for how this pathway will operate as part of the wider package later in the year.”

This streamlined approach and much faster approvals process may be just what the UK needs to encourage more ILS and catastrophe bond transactions to its shores.

This will be beneficial for insurance and reinsurance, or corporate, ILS and cat bond sponsors based in the UK and looking to access the capital markets for sources of risk transfer capacity.

It will also be beneficial for the UK’s competitiveness goal of attracting more international catastrophe bond and ILS business to its financial market.

The slow pace of approvals for ILS and cat bond transaction structures in the United Kingdom has been a hindrance to attracting activity under its regulatory regime. A 10-day approval turnaround will bring the UK’s ILS regime more into line and competitive with other offshore domiciles and could make it far more attractive to sponsors and issuers.

Commenting on the PRA’s reform of the UK’s ILS regime, Caroline Wagstaff, Chief Executive of the London Market Group, said, “This announcement by the PRA to streamline and speed up the application and approval processes for catastrophe bonds is very welcome given their impact on the lived experience of companies looking to use the UK regime. Making our ILS regime streamlined and competitive should encourage greater investment in the UK. We are also pleased that the PRA has listened to member firms on further refinements to the UK ISPV regulatory regime and look forward to continued forward momentum on improvements.”

Sheila Cameron, CEO of the Lloyd’s Market Association, also said today that the association welcomes “the intent to speed up both the authorisation and cat bond approval processes.”