UK Gov confirms new cat bond, ISPV timelines. Launches new consultation to enhance ILS regime

The Government of the United Kingdom has confirmed new authorisation targets for new insurance special purpose vehicle (ISPV) applications, as well as a 10-day target for certain insurance-linked securities (ILS) arrangements, while also launching a new consultation on a more flexible and extended risk transformation regime.

As we reported back in November 2024, the UK’s Prudential Regulation Authority (PRA) was consulting on reforms to approval timelines for the insurance special purpose vehicle (ISPV) regulatory regime, which includes an accelerated pathway for certain catastrophe bond applications and a 10-day target for approvals of certain ILS arrangements.

In an announcement this morning, the Government has confirmed that the PRA will from 2026 begin reporting on ISPV approval timelines.

In order to provide clarity and transparency to those seeking authorisation about the timelines they can expect to experience, from early 2026 the PRA will report against the following targets.

6 weeks for complete new firm authorisation applications from insurance special purpose vehicles.
10 working days for complete new firm authorisation applications from insurance special purpose vehicles that qualify for an accelerated pathway.

Which seems to confirm that the new timeline targets for approval of insurance-linked securities (ILS) structures in the UK have been adopted, with brand new ISPV’s to be approved within 6 weeks, but those falling under the accelerated pathway now to be approved within 10 days.

The accelerated pathway is expected to apply to more simple catastrophe bond applications, such as repeat issuances from the same ISPV structure.

Which is a meaningful improvement on timelines previously being met, which has always been one of the issues the ILS industry has had with transacting more using UK ISPV’s.

On top of this, the UK Government has launched a new consultation on its Risk Transformation Regulations, with the express goal of making the regime, which is largely applicable to catastrophe bonds and insurance-linked securities (ILS), more flexible.

Emma Reynolds MP, Economic Secretary to the Treasury, explained, “The UK is a natural home for complex and innovative mechanisms to transfer risk, with a long history and readily available experts and advisers. As more novel and extreme risks arise, so does the need for a robust and flexible insurance sector. The UK is well placed to support this rise in global uncertainty and in turn create economic growth in the UK.

“This consultation focuses on opening up access to direct funding from investors in capital markets through insurance linked securities (ILS). This risk transformation activity provides insurers with an alternative route to increase their capacity to support risk across the wider economy. The consultation also follows up the commitment, as published today in the government’s response to its captive insurance consultation, to propose a wider use of protected cell companies.

“I have been pleased to see the Prudential Regulation Authority already consult on changes to their rules for accelerated ILS deals, more flexible funding methods and increasing the amount of activity a transformation vehicle can carry out.

“Taken together with the ambitions set out in the government’s Financial Services Growth and Competitiveness Strategy and Regulatory Action Plan for quicker approval decisions from regulators, I am confident we will deliver a more flexible, faster and less burdensome regulatory environment.”

All of which sounds very promising for the UK’s ILS ambitions, as the Government continues to see bringing more catastrophe bond and ILS business to the country as a potential driver for economic growth, as well as a vital tool for its financial markets.

This latest consultation is designed to build on, “the previous options created by the Risk Transformation Regulations to deliver a wider range of risk transfer options in the UK.”

The consultation further explains that, “The government has received industry feedback that the existing legislative framework for risk transformation activity is holding back UK deals.”

The new consultation is largely of relevance to ILS, but the document also contains more proposals to expand the new UK captive insurance regime to help more businesses access captive insurance solutions.

Of relevance to the ILS market, the first target of the consultation is focused on clarifying funding requirements for ILS deals, including giving the PRA more flexibility in how it sets funding requirements.

It explains, “The government plans to make any legislative changes required to allow the PRA more flexibility to make rules on appropriate funding options. As part of this, the government recognises the importance to the PRA’s primary objectives of ensuring any changes do not undermine the effectiveness of the risk transfer and that firms’ risk management practices remain appropriate. This includes the PRA’s responsibilities in ensuring UK insurers ceding risk to transformer vehicles remain appropriately capitalised. The PRA will need to balance these risks with its secondary growth and competitiveness objective, which growth of the UK ILS industry would be consistent with.”

The second piece of the consultation of relevance to catastrophe bond and ILS sponsors is a proposal to open up the marketplace to non-insurers.

It is more burdensome for non-insurers to sponsor insurance-linked securities (ILS) arrangements, the Government’s document states, but this proposal would bring assumption of risks from non-insurers within the regulations.

“This would expand the risk mitigation options available to non-insurers, allowing them to engage directly with a transformer vehicle that carries out the regulated activity of insurance risk transformation. The government recognises that the PRA and FCA may look to introduce additional rules to mitigate potential arbitrage or conduct risks that could arise,” the consultation document states.

Increased flexibility at authorisation of ISPV and ILS structures is the next focus, with the document explaining that, “The government is concerned that this approach excessively restricts innovation within the risk transformation sector. This is because those operating transformer vehicles may not necessarily be able to identify the full range of uses they may have for their vehicles at the point of application. To require them to undertake a new application, or repeated applications, could be a barrier to exploring new opportunities.”

Next, is a proposal to extend the uses of cells with protected cell companies, stating, “The government intends to remove this restriction to allow a cell of a PCC to assume risk from more than one undertaking and under more than one risk transformation transaction.”

PCC’s are also the focus for the captive consultation aspects, stating, “Were PCCs able to operate as insurance undertakings, each cell could operate as a separate undertaking with segregated assets and liabilities, but with a single legal personality to facilitate authorisations. This could reduce the speed and costs of non-insurance businesses setting up captive insurers.”

Tax is also in focus, but on this it is more of an affirmation as the consultation states, “Risk transformation activity in the UK is subject to dedicated tax regulations: the Risk Transformation (Tax) Regulations 2017. The government recognises that the tax benefits transformer vehicles receive through these regulations are an essential element of the risk transformation regime. The government is committed to retaining these benefits, while recognising the importance of anti-avoidance tests that appropriately protect against abuse.”

These wide-ranging proposals to be consulted on open up the use-case for insurance-linked securities (ILS) within the UK and should prove attractive to potential sponsors of catastrophe bonds, collateralised reinsurance and other ILS arrangements.

In particular, the extension to allow non-insurers to be sponsors of ILS and risk transformation arrangements is an interesting one, as alongside the way transformers and protected cells are proposed to be regulated it perhaps opens up the potential for corporate or sovereign sponsors to be more efficiently able to access the capital markets in catastrophe bond or other ILS formats for their risk transfer needs from the UK.

The new timelines, alongside the new consultation proposals, will bring the UK’s ILS and risk transformation regulatory regime more closely into line with other ILS domiciles, hence should make the UK a more competitive option for those looking to transact risk with capital market investors from the country.