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Lloyd’s ILS growth plans will be hampered without tax rule changes

The ILS market has expressed concerns that the tax treatment of UK vehicles could derails efforts from Lloyd's outlined in Blueprint One to establish itself as a new centre for the alternative market.

ILS market participants told Trading Risk that the tax rules would need to be clarified for Lloyd's ambitions to be achieved.

While the UK ILS regime offers tax exemptions to ILS special-purpose vehicles, syndicates and managing agents that are not using such vehicles may be subject to tax.

“If I am a tax-exempt investor and these vehicles are not tax-exempt why would I want to use these when I can do it in Bermuda, Cayman, Guernsey or London outside of Lloyd’s?” questions Horseshoe CEO Andre Perez.

However, Leadenhall CEO Luca Albertini said consideration of taxation levels would be set against other costs.

“Tax would be an additional cost and would be only justifiable if I could get in return more leverage or fewer other frictional costs.”

But even if leverage were available, not everyone would be interested in a high-octane play, he noted.

“The way I manage many things is I never have a single provider. There is always a merit to have more than one solution because any jurisdiction – including Bermuda’s – can tomorrow turn out to be very difficult,” Albertini added.

Lloyd’s has said it will consider using both the UK’s ILS rules and other structures.

“Lloyd’s is exploring which of the several potential end-state structures for ILS are most attractive to our market and to investors, recognising that there may be more than one ‘right’ answer,” a spokesperson said.

“Our aim is to produce a clear roadmap setting out a structure that works and which Lloyd’s will support with standardised documentation, disclosures and reporting to make investing at Lloyd’s through ILS funds as clear and straightforward as possible.

“We will talk to regulators and tax authorities if that proves necessary to enable us to deliver a structure that works and is attractive to investors.”

It is not yet known what regulatory approvals will be required for Lloyd’s ILS structures, and in particular whether the Prudential Regulation Authority (PRA) will have oversight as it does over UK ILS instruments.

“While the PRA is making progress, [achieving approval] is still a long and arduous process. If it’s going to be the same regulatory process [at Lloyd’s] that’s not going to be to the platform’s advantage,” Perez explained.

The Corporation will also need to weigh up the imperative to deliver flexibility amid plans to help syndicates offer ILS structures using Corporation-standard documentation.

This was one of the immediate priorities for a “capital platform” under its blueprint targets.

There is an underlying tension between standardised documents and the need for flexibility that particular investors require, Willkie Farr partner Joe Ferraro told Trading Risk.

“Standardised documentation can be extremely useful in making the capital-raising regime efficient, but at the same time it has to be flexible enough to acknowledge the different ways in which investors are accustomed to putting capital into a vehicle,” he added.

“Investors need to be able to negotiate differentiated investment terms in accordance either with what they are accustomed to or what their own investment criteria requires.”

Some ILS participants said they have not been able to use the protected cell company (PCC) structure needed to write multiple collateralised deals under a single umbrella under the UK’s ILS regime because of the PRA’s stance.

However, Brit’s Sussex Capital used the structure last year and Beazley registered a PCC: Fuchsia Capital.

There is hope a PCC-type structure can exist within the Lloyd’s framework and so far the Corporation is thought to be listening.

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