Pressure builds on UK Treasury to cut red tape to foster ILS and captive growth

The London insurance market has told the economic secretary to the Treasury, John Glen MP, that it is worried the UK may lose out on new and fast-growing areas of business such as insurance-linked securities (ILS) and captives because of an inflexible and overly bureaucratic regulatory framework. Lord Hollick, chair of the Industry and Regulators Committee, which is leading the House of Lords inquiry into commercial insurance and reinsurance regulation, says that based on consultation and evidence given at last week’s hearing, the market is frustrated by the uncooperative approach taken by the Financial Conduct Authority (FCA) in particular. Comparisons were made with much more user-friendly supervisors in other leading insurance and reinsurance markets such as Bermuda and Singapore, which work constructively with firms to understand and comply with the rules and thus help develop the market, not hinder it. Too often, firms in London are told to simply look at the FCA website and work it out themselves, states Lord Hollick in a letter to MP Glen. Lord Hollick advises that the UK authorities would do well to copy the approach of the Monetary Authority of Singapore (MAS), which uses an expert market and academic advisory panel to help develop policy. It is no coincidence that Singapore has recently adopted innovative rules to foster the growth of its ILS and captive sectors. “Industry witnesses highlighted that regulators in other jurisdictions, notably Singapore and Bermuda, seek to support new businesses through difficult and complicated regulatory processes by means of collaborative, open dialogue. This was contrasted with the approach of the UK regulators, which were said to be more likely simply to point new businesses to a website and ask them to make their own judgement on the requirements,” states the letter. “This difference in approach was also described in relation to stakeholder and practitioner panels that the regulators operate, with witnesses suggesting that these panels – particularly in the case of the FCA – are selected by the regulators and meet in relative secrecy, with meetings often consisting of the regulator outlining its approach rather than taking feedback from stakeholders,” continues Lord Hollick’s letter. “It was pointed out that the MAS has an advisory panel consisting of senior business leaders and academics to whom the regulator can put policy questions, providing the benefit of this expertise in the development of policy. The UK industry would likely benefit if UK regulators would adopt a similar and more collaborative approach,” it adds. The committee also outlined the concerns it heard from the industry about a lack of proportionality in the regulation of the London market by the FCA and the Prudential Regulation Authority (PRA), which was described as overly demanding and burdensome. “The committee also outlined the evidence it heard that an overly inflexible culture within the regulators may have inhibited the development of new forms of business within the UK commercial insurance and reinsurance industry, such as ILS and captives,” the letter states. “While the committee welcomes the continued success of the London market, we are concerned that the UK may lose out on new and fast-growing areas of business because of an overly inflexible and bureaucratic regulatory framework. There is a need for regulators to consider whether current rules could be applied more proportionately and regulators should ensure that their rulebooks are achieving their objectives in the most efficient way possible,” writes Lord Hollick. The good news is that while giving evidence to the House of Lords inquiry last week, MP Glen acknowledged concerns that the current regulatory approach is too cautious, slow to respond and burdensome. However, as the UK reviews insurance regulation post-Brexit, he warned that the UK insurance industry should not pursue more nimble regulation and growth at “all cost”. Glen admitted that efforts to develop a market for captives and ILS in the UK had met with limited success. Lloyd’s established a captive offering in 1998 but only attracted one captive, which was placed into runoff in 2001. In 2020, Lloyd’s said it would look at ways to revive its captive offering. Commenting on the lack of a UK legal and regulatory framework for hosting captives outside of Lloyd’s, Glen said: “We see more captives operating in other jurisdictions. Again, that is something that the PRA is very aware of, and I think it is right for further work to be done. I would hope that we will see an evolution in the way that insurance and reinsurance is offered to big corporates and is delivered by corporates, [and that] we find an appropriate way of developing that market in the UK,” he said. Glen also indicated that more could be done to develop the UK’s ILS market, which has had limited success since legislation was introduced five years ago. “The risk transformation regulations of 2017 did lead to a tax-efficient framework in the UK for insurance-linked securities. I recognise that we have only had eight [ILS formed] over the past five years and we are looking at what more we can do, what happens in terms of the green link, and how we can make a more streamlined regime to make that more effective,” said Glen. “I remember celebrating the ILS [legislation] coming in, but it was hoped that there would be more [ILS action]. So that is something we need to look at,” he said.

Pressure builds on UK Treasury to cut red tape to foster ILS and captive growth

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