HM Treasury has now published a formal consultation on legislation to implement a new regulatory, corporate and tax framework for insurance linked securities (“ILS”) business in the UK. This latest consultation follows the March 2016 initial consultation which sought feedback on the overall approach that the UK should take to develop a more competitive market for alternative risk transfer (see our blog post UK embraces ILS structures on 4 March 2016).

The regime is expected to come into effect on 1 April 2017.

Brief overview of the proposed ILS regime


The draft Risk Transformation Regulations 2017 set out in Annex A of the consultation (the Draft Regulations) establish the structure for a protected cell company (“PCC”) regime for multi-arrangement Insurance Special Purpose Vehicles (or “mISPVs”). Through this structure different contracts for risk transfer are segregated within the special purpose vehicle. PCCs allow pools of assets and liabilities to be segregated within a company, such that the assets of one cell cannot be used to meet the liabilities of another cell (and vice versa). Such vehicles are now common in the established ILS jurisdictions, as well as in jurisdictions such as Luxembourg where they are also frequently used for repackaging and securitisation transactions. Under the proposals the core requirements of Solvency II will apply in respect of each contractual arrangement including the subordination of investors’ claims and the requirement for each risk transfer to be “fully funded” – a matter of growing relevance in an era of negative returns on “safe” investments.

The Draft Regulations require that PCCs should be private companies limited by shares. It will not be possible to have PCCs operate as public limited companies. New cells can be added with a simple resolution of the PCC board and can similarly be dissolved by the board. The PCC will be able to issue securities, both debt or equity, on behalf of each cell. The Draft Regulations make the board of directors subject to the same duties as a conventional company incorporated under the Companies Act 2006. PCCs should be free to choose between IFRS and UK GAAP standards.


Following consultation the Government proposes to adopt a bespoke taxation regime for ISPVs authorised to carry out insurance risk transformation (details of which are set out in Annex B of the consultation). This approach includes the exemption of insurance risk transformation of ISPVs from corporate tax and the exemption of foreign investors from withholding tax. The tax advantages set out will only be available however where there is a genuine transfer of risk to the ISPV.

Authorisation and supervision

The Draft Regulations introduce a new regulated activity of “insurance risk transformation” under the Financial Services and Markets Act 2000.

A joint consultation paper has been issued by both the Prudential Regulation Authority and Financial Services Authority on the authorisation and supervision of ISPVs (PRA CP42/16/ FCA CP16-34 – Authorisation and supervision of insurance special purpose vehicles).

Anyone wishing to operate in the UK as an ISPV will need to apply to the PRA for permission to perform this activity. The Prudential Regulation Authority will only grant permission where the applicant meets specific conditions.

Given the potentially time-sensitive nature of ILS transactions, the PRA will offer a facility for prospective ISPV applicants to discuss their proposals prior to application. Engagement prior to the application gives applicants the opportunity to receive early feedback from the regulators regarding their plans, highlighting any potential concerns.

The PRA proposes requiring approved mISPVs to notify it when establishing a new cell at least ten working days prior to the proposed effective date for establishing the cell. The mISVP must be able to demonstrate how the new cell is compliant with its Regulatory Business Plan.


HM Treasury consultation on the Draft Regulations will run until 18 January 2017.

Responses to PRA CP42/16/ FCA CP16-34 are invited by 23 February 2017.

The regime is expected to come into force on 1 April 2017.

Please contact us with any questions.