New legislation now allows Insurance Linked Securities deals to
take place within a new specially designed framework in the UK.
Insurance Linked Securities (ILS) enable insurers to transfer
large and complex risks to capital market investors. A UK regime
will help to strengthen the sector’s contribution to the UK
economy and enhance the UK’s position as a leader in this global
industry. Increased capacity in the market should help reduce
costs for insurers, which is good for business and consumers.
Currently UK insurers use ILS to help manage the risks of their
business by arranging deals with off-shore vehicles. These rule
changes ensure the Prudential Regulation Authority (PRA) can
apply a fit-for-purpose regulatory approach to Insurance Linked
Securities vehicles, bringing the UK’s expertise and influence to
a growing market.
Economic Secretary to the Treasury, said:
London is the largest global hub for commercial and specialty
insurance and reinsurance, and can offer a wide range of
expertise unmatched in the global market. By bringing Insurance
Linked Securities deals to the UK, not only can we open up a
valuable new market, but we can also ensure its world-class
regulation, bringing benefits to the economy, UK businesses, and
consumers.
Insurance Linked Securities are a form of alternative risk
transfer which gives protection buyers new options to transfer
risk to the capital markets. They are commonly used to mitigate
catastrophic risk arising from natural disasters where the human
and economic costs are high – new research commissioned by the
Department for International Development shows that disasters
cost $30 billion a year across 77 of the poorest countries.
Use of Insurance Linked Securities has grown very significantly
in recent years and is now an established part of the global
reinsurance market. Capital backing Insurance Linked Securities
stands at around $90 billion. Consultancy firm EY has estimated
that this market could grow to a value of $224 billion by 2021.
Insurance Linked Securities use a range of specialist skills and
services to arrange the deals, including underwriting, risk
modelling, brokerage, legal and capital markets expertise.
