The UK’s Prudential Regulation Authority (PRA) has now officially launched its consultation on reforms for the insurance special purpose vehicle (ISPV) regulatory regime, which incorporates the accelerated pathway for certain catastrophe bond applications and a 10-day goal for approvals of certain ILS arrangements.

The consultation was teased back in September, after we first reported that the UK government has an ambition to boost the regulatory environment to be used of ISPV’s for insurance-linked securities (ILS), in order to encourage more ILS and catastrophe bond issuance within the UK.

The PRA said today that, “The proposed reforms are intended to boost the protection and soundness of the insurance sector by making more diversified reinsurance capital available to cedants while also furthering the PRA’s secondary competitiveness and growth objective by making authorisation of UK ISPVs faster and easier.”

In addition to the accelerated pathway for certain catastrophe bond applications and a 10-day approval timeframe for certain arrangements, the proposals also aim to make it easier for more activities with the capital markets to be undertaken within the UK.

The PRA explained, “The proposals introduce a recent accelerated pathway for certain UK ISPV applications (e.g. some varieties of catastrophe bonds) which meet the standards set out within the PRA’s proposed recent statement of policy – Approach to authorising and supervising UK insurance special purpose vehicles. Under the accelerated pathway, in collaboration with the Financial Conduct Authority (FCA), the PRA proposes to think about applications and, where satisfied, issue approvals inside 10 working days (fairly than the present 4–6-week process) of an application being submitted to the PRA and deemed complete.

“As well as, the proposed reforms will make it easier for a wider range of current market practices to be undertaken within the UK, while also streamlining and speeding up the usual application and approval processes.

“The reforms may also make clear the PRA’s expectations of UK insurers who cede risks to Special Purpose Vehicles, wherever they’re established.”

Sam Woods the Deputy Governor of the Bank of England for prudential regulation said, “These reforms will deliver a much faster turn-around time for approval of recent Insurance Special Purpose Vehicles within the UK, supporting growth and competitiveness while maintaining safety and soundness.”

The proposed changes are:

a. Structural changes to:

• clarify that UK ISPVs can count realised investment returns which might be retained by the vehicle to cover the combination maximum risk exposure (AMRE) and that the AMRE may increase over time commensurate with the realisation of investment returns which might be retained within the vehicle;
• amend PRA rules to disapply the requirement that UK multi arrangement ISPVs (UK MISPVs) have to be formed as Protected Cell Corporations (PCCs) in cases where they assume risks under multiple separate risk transformation transaction and where those separate transactions constitute a single contractual arrangement;
• allow UK ISPVs to utilize grace periods in relation to the fully funded in any respect times (FFAAT) requirement in some scenarios; and
• make clear using Limited Recourse Clauses (LRCs) by UK ISPVs.

b. Process changes to:

• authorise, via an ‘accelerated pathway’, certain UK ISPV applications which meet criteria set out within the proposed recent statement of policy (SoP, see paragraph 1.8) (eg some varieties of catastrophe bonds (cat bonds) are prone to meet the standards); and
• simplify the authorisation of all other UK ISPVs.

The PRA has included indicative draft application forms at Appendix 6 to display what applicants can be asked to submit following these changes.

c. Updates to PRA expectations of (re)insurers ceding to SPVs:

• introduce general expectations for UK (re)insurers using SPVs as risk mitigation; and
• make clear expectations with regards to using SPVs to transfer long run insurance business risks which might be subject to material market and credit risk.

d. Changes to the Senior Managers and Certification Regime (SM&CR):

• Creation of a recent Senior Management Function (SMF) specifically for UK ISPVs, resulting in fewer SMF applications being required for UK ISPVs.

e. Consequential changes:

The PRA proposes to make other minor or consequential changes including to enhance clarity and to reflect feedback received in CP5/24 that was beyond the scope of that consultation (as noted in Chapter 11 of PS 15/24).

Feedback on the proposals is now being sought and the total consultation document, with details on all of the consultation proposal points above, will be found here.

The simplification of application and approval processes are key and will help to drive more interest in catastrophe bond and ILS issuance within the UK.

But so too are the items focused on fully-funded grace periods, which have been an actual sticking-point and held back insurance-linked securities (ILS) activity within the country.

The query will probably be, whether the UK can ever turn out to be as efficient, fast, or cost-effective as established ILS domiciles. But, equivalence with them is probably going not vital to stimulate some more activity within the country, as these improvements should serve to make the UK’s ILS regulatory regime quite a bit more attractive to sponsors of catastrophe bonds and other third-party capital backed reinsurance arrangements than it’s today.