The UK government has made clear that protected cell companies (PCCs) will only be permitted for insurance-linked securities (ILS) transactions and will not be allowed for wider use in the insurance industry or in other markets. Both the traditional insurance industry and the ILS sector welcomed the draft regulations published by the government on November 23.

Since 2015, HM Treasury, HM Revenue & Customs, the Prudential Regulation Authority and the Financial Conduct Authority have jointly formed the London Market insurance-linked securities working group to study the tax and regulatory framework for insurance-linked securities.

At the core of the draft regulations is the introduction of a protected cell regime to facilitate multi-arrangement insurance special purpose vehicles (ISPVs). However, this arrangement would lead to protected cell companies becoming increasingly common in traditional insurance in the UK, causing discontent.

The consultation paper shows that protected cell companies would be widely used among ILS reinsurers, investors and intermediaries, and that support under UK law would bring huge benefits to ILS practitioners. Although some advisers noted that PCCs as a corporate organizational structure are also widely used in other fields, at this stage the government still wishes to conduct further assessment of protected cell companies.

As a model for reducing operating costs by establishing small captives, the protected cell company was first invented by Guernsey in the late 1990s, was promoted worldwide, and later became the main transaction vehicle for insurance-linked securities.

The draft regulations set out the tax framework for multi-arrangement ISPVs and state that protected cell captives should fully meet Solvency II requirements.

Economic Secretary to the Treasury Simon Kirby MP said insurance-linked securities (ILS) have developed continuously in recent years and have become an important feature of the global reinsurance market, and will be increasingly important in the future. But it is clear that the UK has not yet developed an applicable commercial, tax and regulatory framework for this non-traditional risk transfer mechanism. He believes the UK will find appropriate ways to contribute to the development of the global ILS market.

Malcolm Newman of the London Market Group said some details of the draft still need to be discussed and refined through dialogue with the government and regulators so that the UK can still conduct ILS business onshore in 2017.

Before Parliament passes the regulations in early 2017, the market can still discuss the relevant proposals.

Source: Captivereview.com