The UK government has outlined plans to transform London into a leading hub for global ILS business in Chancellor George Osborne's final Budget speech before the general election.
Turning the UK into an attractive domicile for ILS business is a stated aim within the 2015 Budget. it is hoped the UK will compete with more established domiciles such as Bermuda and the Cayman Islands for this business, which includes specialist instruments such as catastrophe bonds and industry loss warranties among others.
Osborne's speech, ahead of the scheduled UK election on May 7, also pledged governmental support to “encourage new business like global reinsurance”.
The announcement followed the Chancellor’s Autumn Statement which had suggested that the government was looking to bring more reinsurance business to the UK. Deep within paragraph 2.228 of the Budget 2015 document, released today, lies the commitment to attract ILS business.
“To take this forward, building upon the UK’s position as a world leader in the global insurance market, the government will work with the industry and regulators to develop a new competitive corporate and tax structure for allowing Insurance Linked Securities to be domiciled in the UK,” said the budget.
“Global reinsurance – The government announced at Autumn Statement 2014 that it would explore options to attract more reinsurance business to the UK… This alternative form of reinsurance makes greater use of capital markets and is a key growth opportunity for the sector,” added the Treasury’s report.
If the Chancellor follows through on this proposal then it would potentially set up the UK’s London market – the biggest city hub for insurance business globally – as a direct rival to ILS leader Bermuda.
Bermuda has traditionally been the most prominent hub for ILS business, dominating issuance of catastrophe bonds over the past decade.
The Cayman Islands, another self-governed British Overseas Territory, is another prominent source of ILS issuance.
Several other UK territories are also interested in competing for cat bonds: the Guernsey International Financial Centre has pitched itself as an ILS hub while the Isle of Man had previously stated that it was hoping to benefit from the surge of interest in the alternative capital space. Both of those offshore domiciles have competed in recent years to attract captive insurance business.
Senior figures in London's insurance and reinsurance markets have already responded to the Budget 2015 announcement.
“We hope this will prove a positive first step in a long-term project for our industry to work collaboratively with HM Treasury to explore more ways of attracting international business,” said Dave Matcham, chief executive of the International Underwriting Association.
“The London Market Group, through an initiative sponsored by IUA chairman Malcolm Newman, is already in close contact with Treasury officials and we look forward to continuing this relationship in the months ahead,” he added.
Steve Hearn, chairman of the London Market Group (LMG) and deputy CEO at Willis Group, also welcomed today's announcement.
“We appreciate this and will ensure that the London market plays its full role in developing the proposals in partnership with Treasury, HMRC and our regulators. We look forward to this being the start of an ongoing dialogue to cover the other proposals we put forward,” he added.
The LMG had previously called for regulatory change to better enable the London market to compete with other ILS hubs, such as Bermuda and the Cayman Islands.
Colin Graham, UK insurance tax leader at accounting and risk management firm PwC, said the announcement “does not go far enough” on developing ILS for London.
“The announcement today of a commitment to develop an ILS regime in the UK is a boost for the insurance sector and should stimulate growth. This is good news and a direct response to engagement with the industry in the last few months on global competitiveness from a regulatory and tax perspective,” said Graham.
“Despite this and the government's recognition of the UK as a "world leader" in global insurance, it is disappointing not to hear any feedback on the broader competitiveness review that was announced in the Autumn Statement. The ILS announcement is very positive, but arguably does not go far enough,” he said.
“We also wait to see the detail of the Diverted Profits Tax that takes effect on 1 April to see whether government has listened to the industry's concerns in relation to its scope and associated concerns over complexity and global competitiveness,” added Graham.
Osborne’s budget also included an announcement on the Insurance Fraud Taskforce, announced in December 2014.
“The Taskforce has today published an interim report which sets out the areas that the group will explore: the encouragement of fraudulent claims; the drivers of policyholder behaviour; fraud deterrents in the claims process; and the role of fraud data. It will publish full recommendations in its final report later in 2015,” said the budget report.
“The Taskforce has also made an early recommendation to the insurance industry to update guidance on the prevention of application fraud. The Association of British Insurers and the British Insurance Brokers’ Association have agreed to take forward this action by the end of 2015,” added the Treasury.
By David Benyon - email@example.com