Reforms Proposed to UK Insurance Special Purpose Vehicle Regulatory Framework

The Prudential Regulation Authority (PRA) has released Consultation Paper (CP) 15/24, proposing significant reforms to the UK insurance special purpose vehicle (UK ISPV) framework. These reforms aim to modernize regulatory processes, enhance the United Kingdom's international competitiveness, and expand participation in the insurance linked securities (ILS) market, where special purpose vehicles (SPVs) securitize insurance risks via capital markets. The proposed changes respond to stakeholder calls for a more attractive regulatory framework for ISPVs in the United Kingdom.

The UK ISPV framework, key to the ILS market, has seen limited uptake since 2017. The PRA's proposed reforms aim to enhance its competitiveness and streamline processes to align with global standards.

Key Proposals and Enhancements

1. Accelerated pathway for authorization: Certain UK ISPV applications, such as those involving catastrophe bonds with standardized structures, will benefit from a fast-tracked approval process of 10 working days. This represents a significant reduction from the current 4–6-week timeline.
2. Flexible structural arrangements: The PRA proposes allowing multi-arrangement ISPVs to operate without being structured as protected cell companies, provided they meet defined criteria. This change is expected to lower costs and reduce operational inefficiencies.
3. Clarity on limited recourse clauses: The PRA plans to explicitly recognize limited recourse clauses to limit SPV liabilities to the value of their assets, with clear criteria for their use. This change aims to improve transparency and facilitate effective risk transfer.
4. Grace periods for collateral funding: A 30-day grace period will be introduced for SPVs to fully fund new risk transformation transactions, easing the renewal process and avoiding over-collateralization.
5. Simplified senior manager requirements: Only one senior management function role, that of a chief executive, will be required for ISPVs, streamlining governance processes.
6. Updated expectations for cedants: The PRA proposes clearer guidance for insurers transferring risks to SPVs, including restrictions on transferring long-duration liabilities such as annuities, which carry significant credit and market risks.

Sam Woods, deputy governor for prudential regulation, noted, "These reforms will deliver a much faster turn-around time for approval of new insurance special purpose vehicles in the [United Kingdom], supporting growth and competitiveness while maintaining safety and soundness."

Consultation and Next Steps

The consultation period closes on February 14, 2025, and stakeholders are invited to provide feedback to [email protected]. The PRA intends to finalize and implement these reforms by mid-2025, marking a significant step forward for the United Kingdom's ISPV framework.