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UK: Insurance Linked Securities - One step closer to creating a London hub

04 March 2016
UK Government publishes consultation paper: March 2016

Introduction

On 1 March 2016, the UK government published a consultation paper announcing proposals to reform UK law as it applies to insurance linked securities. This is part of a strategy to allow London to retain its status as "a specialist insurance hub" and to participate more actively in the growth of alternative risk transfer transactions.

The consultation paper seeks views from the insurance industry on a number of key issues. The consultation phase is scheduled to run until the end of April 2016.  If it decides to proceed, the government plans to produce draft legislation by the end of 2016.

Summary of proposals

The paper makes some radical suggestions. The most striking is the proposal to amend UK company and insolvency law to allow the use of "protected cell companies".  This type of corporate structure has existed for many years in several of the jurisdictions which have been the most active in the alternative risk transfer market.  The paper proposes that use of UK protected cell companies should be limited to insurance linked securities transactions, but if it is adopted there will be wide interest in expanding it to allow application for many other types of transactions.

There is a clear intention to address the perceived regulatory and tax disadvantages of the UK. The government proposes a swift authorisation process, relatively simple ongoing governance requirements, and an exemption from UK corporation tax for the issuer of insurance linked securities (meaning that shareholders in the issuer would be taxed on their income from it, in the same way as they would be if investing in an investment fund).

The government acknowledges that not all difficulties can be easily overcome. In particular, interest payments on insurance linked securities would still be subject to withholding tax rules, where they are made to a jurisdiction not covered by an appropriate tax treaty.  Although several exceptions exist, they would not always be applicable, and the government does not consider that a new exception for insurance linked securities can be made, at least in the near future.

Although radical in some respects, the proposals are cautious and practical in others. In particular, the government proposes that only "qualified institutional buyers" should be permitted to buy or trade in insurance linked securities.  This restriction reflects the government's expectation that only knowledgeable and sophisticated investors are likely to be interested in buying these securities.  It avoids the need to design a specialist investor protection regime, as might be necessary if a wider pool of investors were permitted.

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