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On 20 July 2017, HM Treasury (HMT) published The Risk Transformation Regulations 2017 (the Regulations), which introduce a new regime for insurance linked securities (lLS) in the UK. The Regulations received Parliamentary approval on 29 November 2017.

The Risk Transformation (Tax) Regulations 2017 (the Tax Regulations) were also published on 20 July 2017 and reissued in an amended form on 13 October 2017, and also received Parliamentary approval on 29 November 2017.

The publication of the Regulations and the Tax Regulations was accompanied by an explanatory paper setting out how the Regulations and the Tax Regulations reflect responses to the consultation on the proposed draft regulations published in November 2016 (the Consultation).

On 1 November, the Prudential Regulation Authority (PRA) published its Policy Statement on the authorisation and supervision of insurance special purpose vehicles (ISPVs), PRA PS26/17 (the Policy Statement), and related Supervisory Statement, PRA SS8/17 (the Supervisory Statement).

We have reported on the earlier proposals in previous Ashurst insurance publications.1

In this article we highlight some of the key updates that have been made to the Regulations and the Tax Regulations to reflect the feedback received on the Consultation, as well as the main changes in the Policy Statement.

Notification of creation of new cells

Some respondents to the Consultation raised concerns about the proposed requirement to notify the PRA prior to the creation of new cells in a Protected Cell Company (PCC).2 In response to the feedback received, the Regulations now provide for a post-transaction notification regime.

Under the new regime, when a prospective ISPV applies to the PRA for permission to perform a regulated activity under section 55A of the Financial Services and Markets Act 2000, it is required to define its approach to the creation of new cells or risk transfer deals. If the PRA authorises the ISPV’s proposed approach, the ISPV may carry out these activities in the future without the need for further authorisation, provided that the ISPV notifies the PRA within five days of any new assumption of risk.

While the post-notification regime for the creation of new cells is a marked improvement, the authorisation process is still anticipated to be six to eight weeks for non-complex, single-transaction ISPVs, and possibly longer for PCCs. Consequently, some other jurisdictions will benefit from a potential speed-to-market advantage.

Arrangements between cells

Respondents to the Consultation asked that arrangements between cells be permitted to facilitate, for example, tranching of risks among different groups of investors. The Regulations now include certain provisions to facilitate such arrangements, although these are subject to strict procedural requirements to ensure that the segregation between cells within the PCC remains uncompromised.

Where cells are linked by arrangements made between them, they form a “group of cells” for the purposes of the Regulations. A group of cells can only be used to provide cover for one particular risk transfer at any one time.

Each contractual arrangement for risk transfer must satisfy the fully funded requirement (as to which, please see below) and each cell must remain appropriately ring-fenced. Accordingly, the Regulations require PCCs to keep records and accounts which distinguish between the assets and obligations of each cell and, when two cells enter into arrangements with each other, the accounts must treat such arrangements as if they were set out in a contract made between the two cells.

Where a PCC intends to make use of arrangements between cells, a proposal should be included at the authorisation stage or at a subsequent application to amend its regulatory permissions. Any intra-cell arrangement is subject to the prior written approval of the directors of the PCC, the undertakings from whom the PCC assumes the relevant risk and all persons holding investments issued by the PCC on behalf of the relevant cells. A PCC is also required to notify the PRA within five working days of making the arrangement.

Offers to the public

Some respondents to the Consultation raised concerns that the restriction on offering ILS securities to “non-qualified investors” would cause problems when issuing ILS bonds on the global bond markets, as global bond markets are not restricted to sophisticated investors.

The Regulations retain this restriction, but now define “qualified investor” by reference to the Markets in Financial Instruments Directive II.

The Regulations require issuers to “take such steps as are reasonable” to prevent their ILS subsequently being offered to non-”qualified” persons. Therefore, issuers will need to include wording designed to limit subsequent sales. Query whether there is anything else they could reasonably do: guidance would be helpful.

Directors’ duties

The Regulations replicate the duties of directors found in the Companies Act 2006 (the Act), subject to certain modifications to section 172 of the Act whereby the directors of the PCC have a duty to act fairly between the shareholders of each separate cell of the PCC, rather than between the shareholders of the PCC as a whole.

In response to the feedback received from some respondents, PCC directors are now also under a duty to act in accordance with any “enforceable” arrangements between cells. The duty is owed to the PCC as a whole, so any member of the PCC is be able to enforce it.

PRA Policy Statement and Supervisory Statement

The PRA will only carry out an assessment as to the fitness and propriety of any shareholder with 10 per cent or more of the voting rights in an ISPV, or with “significant influence” over it. Otherwise, it will be up to the ISPV to show to the PRA that it has a “framework” for assessing holders of 10 per cent or more of the capital (but without 10 per cent of the voting rights or significant influence). In relation to a PCC, holdings of interests in cells, irrespective of size, will not need to meet the fit and proper test.

The requirement (under the Solvency II Delegated Regulation) that an ISPV be “fully funded” has given rise to some debate. The PRA has now clearly stated that contingent assets would not help meet the test (even where they would qualify as “ancillary own funds” of a (re)insurer).

Also, the PRA has stated that an “ISPV cannot rely on a limited recourse clause as an alternative to holding assets the value of which is equal to or in excess of its aggregate maximum risk exposure (AMRE)”. A limited recourse clause can, however, be used “as a means of mitigating” the risk that the ISPV ceases to be fully funded. The AMRE must be “determinable” at all times – whether as a fixed amount or one that derives from a model – so that the risk transfer is clear.


The tax regime for ISPVs includes bespoke corporation tax and interest withholding tax exemptions for the ISPV. These tax exemptions will be lost if certain conditions are breached. There are also specific provisions restricting the use of tax losses made by an ISPV. The regime applies to an ISPV only if substantially all of the insurance risk transformation activity carried out by that ISPV relates to business other than basic life assurance and general annuity business.

Tax exemptions

A corporation tax exemption will be given to an ISPV in relation to any profits arising from the activity of insurance risk transformation other than:

  1. administrative or management activities; or
  2. holding investments in excess of the amount “reasonably required” to satisfy the fully funded requirement (as discussed above) for the ISPV or the cell (if the ISPV is a PCC). 

The corporate tax exemption is subject to a 90-day grace period after the satisfaction of all liabilities under a contract of insurance, during which investments which were reasonably required to satisfy the fully funded requirement in respect of risks assumed under that contract can still qualify for the exemption.

There is a complete withholding tax exemption for any payment of interest made to investors in relation to ILS.

The adoption of a blanket exemption for insurance risk transformation activities is to be welcomed and its simplicity is much more attractive than the securitisation regime which was considered as an alternative in the Consultation. ISPVs will obviously be concerned if HMRC takes a restrictive approach to the amount of investments that is “reasonably required” to satisfy the fully funded requirement: guidance on the interpretation of this would be helpful. The extension of the grace period from 30 to 90 days, starting from the satisfaction of all liabilities under the relevant contract rather than from the date when the investments ceased to be reasonably required, is a positive development stemming from the Consultation.

The exemption from interest withholding tax is important to ensure that UK ISPVs will be competitive with ISPVs in other jurisdictions such as Bermuda or the Cayman Islands. No equivalent dividend withholding tax exemption is required as the UK does not impose a withholding tax on dividend payments.

Removal of tax exemptions

If either of the following conditions is satisfied at any time in an accounting period, the exemptions referred to above will not apply in that accounting period or any subsequent one:

  1. the ISPV is liable to a penalty for failure to deliver a tax return or for an error in a tax return; or
  2. having regard to all the circumstances, it would be reasonable to conclude that the purpose or one of the main purposes of the insurance risk transformation, or the arrangements which the insurance risk transformation forms part of, is to secure a tax advantage for any person.

The conditions for the withdrawal of the tax exemptions have, in line with responses to the Consultation, been significantly relaxed since the first draft of the Tax Regulations. The exemptions may be relied on notwithstanding that investors connected to the ceding insurer hold 10 per cent or more of the securities, so as not to obstruct insurers which provide seed capital to ILS funds. The scope for withdrawal of the favourable tax treatment if 
the ISPV incurs a penalty for tax non-compliance has been significantly reduced: this will apply only in particularly serious cases, such as three successive failures to deliver a tax return, or deliberate inaccuracies.

Loss restrictions

Where an ISPV is a PCC, for loss relief purposes the core and each cell will be treated as separate companies and they will not be eligible to surrender or receive surrenders of group relief or consortium relief among themselves.

The ring-fencing of losses in an ISPV is understandable given the corporation tax exemption.

Concluding thoughts

The regime has taken some useful steps forward, such as the dropping of the proposal that ISPVs would have to go through a prior notification process for new cells. The more generous tax treatment should make UK ISPVs more competitive against those based in low-tax jurisdictions. However, the location of the vehicle onshore may present some challenges from a VAT perspective, as, when services supplied by advisers or other professionals to the transformer vehicle are not exempt financial services, they are likely to be treated as standard-rated supplies for VAT purposes. The transformer vehicle (SPV) is unlikely to be able to recover this VAT.

The main challenge that sponsors will face is ensuring that the ISPV remains fully funded, especially where the liability derives from an actuarial model.

Co-author: Caroline Johansen



1. These can be accessed at:  and
2. A PCC comprises a core, which assumes the administrative function of the PCC, and any number of cells which are required to manage the ILS deals that the PCC takes on. 

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The information provided is not intended to be a comprehensive review of all developments in the law and practice, or to cover all aspects of those referred to. Readers should take legal advice before applying it to specific issues or transactions.

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