'Recent transactions show UK regulators are committed to making nascent ILS regime work'
By Katherine Coates, partner, Clifford Chance
The UK's new ILS regime demonstrates flexibility as well as security within a highly-regarded regime
The UK regulator’s commitment to making the country’s new insurance-linked securities (ILS) regime adaptable enough to compete with peers has been clear from our involvement in the UK’s ILS taskforce and in recent transactions in the market.
It is a key goal of the UK ILS regime to provide flexibility for investors to allow the UK to match the ILS capabilities of other jurisdictions – but from within the UK’s highly regarded regulatory and tax regime.
The UK ILS regime provides issuers flexibility with the choice of a single-use insurance special-purpose vehicle or a multi-use protected cell company (PCC) structure.
The PCC structure, with a core administering the PCC and separate, segregated, protected cells to assume risk and issue securities, while novel from a UK legal perspective (we advised Neon on the first UK PCC structure in January 2018), is one that ILS investors will recognise from offshore jurisdictions.
It also allows for investments in ILS through debt or equity securities and we have seen both these structures used in the UK ILS market. The UK’s ILS regime also addresses issues around tax, which previously prevented onshore ILS issuances.
Where a transaction is structured to fall within the UK ILS tax regime, the issuer will not be liable for corporation tax on profits relating to its insurance risk transformation activities.
Also, no withholding tax on interest applies to payments to investors under insurance risk transformation investments.
Investors will note the difference in governing law (English instead of New York) of UK ILS transactions, resulting in a change in the look and feel of documentation.
However, English law delivers an investment which results in a familiar outcome for investors and offers the protection of England’s mature legal system.
Clifford Chance advised Neon on the first UK ILS vehicle and Scor on its recent UK cat bond issuance.
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