UK regulator to offer accelerated ILS authorisation for “credible” sponsors

The UK’s Prudential Regulation Authority (PRA) of the Bank of England, the main financial regulator, continues to place great emphasis on making its insurance-linked securities (ILS) regulatory regime a success and is now promising “accelerated authorisation” for what it terms “credible” sponsors.

Laying out its business plan for 2023 into 2024 this week, the Prudential Regulation Authority (PRA) has said that it will work with market participants to apply changes to the authorisation of insurance special purpose vehicles (ISPV), so the structures that can house catastrophe bonds and other insurance-linked securities (ILS) in the UK.

Most notable is a proposed speeding up of the process to authorise ILS transactions using an iSPV structure in the UK, although it seems not every potential sponsor would be able to benefit from this.

The PRA explained that, in relation to the iSPV changes, it plans to “embed an accelerated authorisation pathway.”

Speed to market has been one of the major issues that has held back the UK’s ILS ambitions, with sponsors finding the UK’s lengthy and time-consuming regulatory process to approve ILS structures challenging to work with, preferring the rapid process available in other domiciles such as Bermuda.

Sponsors want to be able to respond to market conditions quickly, when opting to issue catastrophe bonds, or to enter into other ILS arrangements, especially during hard and challenging reinsurance market conditions as we see today.

So, the promise by the PRA to provide the ability to benefit from an accelerated regulatory authorisation, should go down well with potential sponsors.

However, who an accelerated authorisation process might be available to is a little more challenging to understand.

The PRA said that the accelerated approach would be available to “participants in the wholesale insurance market with a highly credible track record.”

What constitutes a “highly credible track record” is not explained and this seems likely to create a two-speed ILS market in the UK, where those that meet the grade can have their ILS structure authorisation accelerated, while those that don’t may face a longer process still.

Understanding what would qualify a sponsor for the accelerated process is critical, as without that information some will be put off even considering the UK for their ILS arrangements, given there is no visibility of what may qualify them for a faster regulatory process, or not.

We imagine the PRA will make this clearer in due course, as it seems vital for potential UK ILS sponsors to have visibility of the criteria that would see them deemed credible, or otherwise.

Supporting competitive and dynamic markets is stated as one of the PRA’s key goals and ILS has previously been highlighted as an area where some feel the regulator has failed.

A recent report on regulatory accountability from Conservative UK lawmakers, cited the UK insurance-linked securities (ILS) experience as an example of regulatory failure to foster a new market opportunity.

The PRA is keen to demonstrate that it is responding to concerns and it seems we could see a much smoother and more streamlined regulatory process for at least some ILS and cat bond sponsors that choose the UK in the coming year or so.

That will be positive for the global ILS market, offering another more viable choice when it comes to where to domicile your ILS arrangement, but whether it can attract significant deal-flow remains to be seen and more may be required than just a promise of a fast-track for the most “credible” sponsors.

Also read:

UK regulatory approach to ILS deemed “not fit for purpose”.

PRA’s work on UK ILS market continues with consultation on ISPVs.

PRA to bring “flexibility & speed” to UK ILS, fast-track standard structures.

Regulators “inflexible culture” hindered UK ILS ambitions: Lords Committee.

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

ILS an example of UK regulations failing to support industry: LMG CEO.

UK’s PRA wants to improve ILS authorisation process and speed.

UK Gov committee approves plan to exempt ILS from Stamp Duty taxes.

UK needs “flourishing insurance securitisation market” – TheCityUK.