Insurance: UK ISPV reforms rebooted

The Prudential Regulation Authority (PRA) has published consultation paper (CP) 15/24 proposing reforms to the UK Insurance Special Purpose Vehicle (UK ISPV) regulatory framework.

In this blog post, we consider the key proposals from the consultation paper and explore whether it has actual potential to bring the UK ISPV regulatory regime up to speed and in line with other leading jurisdictions. This is not the first time ISPV reforms have been proposed – will these be more successful than previous attempts? 

The general proposals

The new UK Chancellor, Rachel Reeves, has introduced a series of proposals for financial services reforms in her inaugural Mansion House speech on 14 November 2024. They are designed to “cement the UK’s position as a leading financial services centre”. 

Financial services is one of the eight growth sectors in the government’s modern industrial strategy and Ms Reeves stated that the five priority growth opportunities on which that strategy will focus are:

• fintech;
• sustainable finance;
• asset management and wholesale services;
• insurance and reinsurance; and
• capital markets.

We have covered the themes coming out of the 2024 Mansion House speech and what it means for the financial services sector here. 

A focus on (re)insurance

Having insurance and reinsurance as one of the priority growth focuses is an important development for the sector. The proposed ISPV reforms are intended to enhance the safety and soundness of the insurance sector by making more diversified reinsurance capital available to cedants while also furthering the PRA’s competitiveness and growth objective by making authorisation of UK ISPVs faster and easier. This latter point is something that has put the UK at a relative disadvantage compared with some other jurisdictions and is key to attracting new ISPV platforms.

So, why the need for reform?

The UK ISPV regime was introduced in 2017 but, as the PRA itself recognises, has seen “limited uptake” since its introduction. In 2022, we saw the PRA start to take steps to address core issues, which included:

• the introduction of a “standard” Scope of Permission with a shortened approval timeline;
• removing the expectation of certain documentation, including a legal opinion for non-English law contracts, for “standard” applications; and
• allowing individuals to hold multiple SMF roles.

Key areas of reform

Light-touch applications

The application process in the UK is known to be significantly more complex than competing regimes. This is something the PRA has been aware of for some time, and it took steps to address this in 2022 through the introduction of a “standard” application process, however these steps have not gone far enough.

The PRA has taken this feedback on board and has acknowledged that the volume of documentation it requires to be submitted alongside applications can be counterproductive as (i) “not all the documentation provides the required evidence”; and (ii) it also causes an administrative burden on the PRA, which contributes towards a lengthy authorisation process (see below). The PRA now proposes to remove the obligation for an applicant to provide a specific set of documentation, and instead it will provide applicants with a non-exhaustive list of potentially relevant documents and applicants will then have to identify, and in turn provide, a tailored set of relevant documents.

Whilst this proposal is encouraging, the PRA will retain an ability to request further documentation not submitted by the applicant as part of the application process, and so it remains to be seen how streamlined and predictable the revised process will be.

A faster authorisation process – from 6 weeks to 10 days for “standard” ISPVs

Currently, the PRA’s authorisation commitment for ISPVs is 4-6 weeks for standard applications. This is slow in comparison to other jurisdictions (for example, in Bermuda the authorisation process typically takes 7-10 days) and ultimately results in the UK regulatory framework not being able to keep up with the pace of transactions.

The PRA has proposed the introduction of standardised ISPVs, which will have specific structures and contractual terms that are common in the market. The PRA proposes an accelerated approval process for standard ISPVs, where approval would be provided within 10 working days following the receipt of a completed application.

There will be pre-defined criteria for what constitutes a “standard” IPSV. The PRA has confirmed that it expects that a placement of Rule 144A cat bonds will likely meet this criteria.

Lower capital requirements

Under the UK ISPV regime, ISPVs must at all times (i) have assets which equal or exceed their aggregate maximum risk exposure; and (ii) be able to pay amounts as they fall due.

This is an uncontroversial principle, but under the current regime it is unclear whether realised investment returns contribute towards meeting this requirement. The consequence of this uncertainty is that firms are required to invest a larger amount of capital than they would expect (particularly given these are intra-group arrangements) in order offset any variation in Aggregate Maximum Risk Exposure (AMRE) during the lifecycle of an ISPV arrangement.

The PRA has clarified that it will allow realised investment returns to contribute towards meeting the requirement of UK ISPVs to be fully funded at all times. Allowing the contractually agreed AMRE of a UK ISPV with a multi-year contract to increase over time to reflect the realised returns from investment of the funds in the vehicle may potentially allow for a smaller upfront investment in the UK ISPV which is more reflective of an intra-group arrangement.

The PRA considers that this will enhance the ability of firms to use UK ISPVs, making the regime more attractive to firms. Sam Woods, the Deputy Governor of the Bank of England for prudential regulation, said “these reforms will deliver a much faster turn-around time for approval of new Insurance Special Purpose Vehicles in the UK, supporting growth and competitiveness while maintaining safety and soundness".

What next?

Interested parties have the opportunity to provide their feedback to the PRA by Friday 14 February 2025. The PRA proposes that the implementation date for any changes resulting from this consultation would be mid-2025.