Britain aims for catastrophe bond market rules this year

LONDON (Reuters) - Britain aims to produce draft regulations for a home-grown catastrophe bond market later this year, the British finance ministry said on Tuesday as it launched a consultation on the changes needed.

Britain's insurance industry is concerned it is losing market share to offshore centers such as Bermuda, which specialize in structuring and listing insurance-linked securities (ILS) including catastrophe bonds.

Pension and hedge funds have been investing in catastrophe bonds, as returns are higher than in conventional debt markets and risks are uncorrelated to financial markets.

Catastrophe bonds offer high yields but investors risk losing all or part of their principal if a specified natural disaster -- such as a hurricane or earthquake -- occurs.

"The government believes that, with the right framework, London can make a major contribution to the continued growth and development of ILS business," the UK Treasury said in a consultation document.

Around $7 billion worth of catastrophe bonds were issued last year, and a record $24 billion of such bonds are outstanding, according to reinsurance broker Aon Benfield.

Broader ILS capital totals around $70 billion, about 12 percent of overall reinsurance capital.

The Treasury is seeking industry views on how to structure the special purpose vehicles needed to transform insurance risk into capital market instruments such as catastrophe bonds.

It is also seeking views on the tax treatment of the vehicles, to make them more appealing to investors.

(Reporting by Carolyn Cohn; Editing by Catherine Evans)

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