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London market eyes insurance-linked securities to regain market share

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The London reinsurance market, which has been hit by a shift of business to alternative risk transfer vehicles, could regain some of that lost ground by becoming a domicile for insurance-linked securities.

Industry observers last week welcomed U.K. Chancellor of the Exchequer George Osborne's pledge earlier this month to enable ILS offerings to be domiciled onshore in the United Kingdom.

In his budget statement, Mr. Osborne said he considers ILS to be a key growth opportunity for the U.K. reinsurance sector, and that he will work with the industry and regulators “to develop a new corporate and tax structure” to allow ILS to be domiciled in the United Kingdom.

The idea is “a boost for the insurance sector and should stimulate growth,” said Colin Graham, U.K. insurance tax leader for PricewaterhouseCoopers L.L.P. in London.

“We hope this will prove a positive first step in a long-term project for our industry to work collaboratively” with the government “to explore more ways of attracting international business,” said Dave Matcham, CEO of the London-based International Underwriting Association, which represents underwriters.

Steve Hearn, deputy CEO of Willis Group Holdings P.L.C. and chairman of the London Market Group, which already is working to improve the London market's competitive position, welcomed the proposal that he said was discussed with government officials in February.

“Through insurance-linked securities and other financial vehicles, there has been a growing prevalence of alternative capital in the global reinsurance market,” said David Ledger, CEO of Aon Benfield U.K., a unit of Aon P.L.C., in London. Domiciling ILS transactions in the United Kingdom would bring some of that business to the London market, he said.

While most ILS activity has been offshore, several ILS funds already are listed on the stock exchange in the United Kingdom, said David Gubbay, a partner at law firm Reynolds Porter Chamberlain L.L.P. in London.

Establishing special-purpose vehicles in the United Kingdom and retaining the proceeds of the notes they issue would aid the country, but it also would require tax law changes, the attorney said.

“We will watch this space with interest,” Mr. Gubbay said.

“The details matter, and the process matters,” said Rick Miller, New York-based managing director and co-head of insurance-linked securities at Jardine Lloyd Thompson Capital Markets, an arm of London-based brokerage Jardine Lloyd Thompson P.L.C.

“If the revised regulatory and, more importantly, tax framework encourages more overall reinsurance — ILS and traditional — premiums and risk to flow through London, then it could be significant,” Mr. Miller said. “However, if we are simply building a mimicked version of what is already established in Ireland, Guernsey, Bermuda and the Cayman Islands — and to a lesser extent Malta, Luxembourg and Gibraltar — then the impact will be marginal.”