Cat bond law brings glimmer of clarity amid Brexit fog
As London waits to see the Brexit deal that emerges for the UK’s financial services industry, one small part of the sector has quietly received a big legal boost.
It did not receive the same headlines as the latest forecasts of jobs and offices lost or retained, or reports of who hinted at what during this or that speech.
But unlike the known unknowns of the UK’s departure from the European Union, the Risk Transformation Regulations, passed last month, brings some lucidity.
It enables reinsurers to set up vehicles to issue insurance-linked securities (ILS), including catastrophe bonds.
The push to make London a hub for ILS dates back to the government’s 2015 budget, but it has only made it to legislation more than two years later — though with the Brexit referendum and the inconclusive 2017 general election, legislators have had other things on their minds.
But it is the UK regulator which has been praised by the market, for helping Neon Underwriting to get the first ILS vehicle and trade up and running. This has dampened doubts about the UK’s ability to match other, niftier jurisdictions for speed.
The ILS market is expected to properly take off in the summer renewals periods. The market for catastrophe ILS saw record issuance in 2017, and offers investors the warm glow of a sense of social purpose in the age of climate change, and risk uncorrelated to the swathes of asset classes regarded as overvalued.
Some express the usual worries about complex financial products: Do investors fully understand them? Do the models work correctly? Do they pose risk to other areas of the financial system?
Insiders point out that the cat bond market weathered last year’s tests, after hurricanes ravaged the US. And it may reassure sceptics that the market will develop under the watchful eye of the Bank of England rather than elsewhere.
Those involved in the new legislation talk of London expanding the ILS pie, rather than simply gobbling up a greater share of what is already out there. Compared with low tax competitors like Bermuda and Guernsey, the City offers highly-skilled people and firms in a concentrated area.
But perhaps because the move towards the law began several years ago, it appears rather anachronistic in the context of the government wrestling with Brexit.
The country’s insurance industry is waiting to see what happens to regulations after the big split, with some politicians keener than the Prudential Regulation Authority to diverge from the Solvency II framework.
Most recently, reports that the government may never release a position paper on the future of financial services will be viewed with suspicion.
Away from the grand arguments about the effects of the UK leaving the EU, the ILS law is a concrete example of regulatory progress, even if the Brexit fog augurs the opposite.