Bermuda forges ahead in ILS innovation

Bermuda has emerged as the centre of excellence for the creation, servicing and listing of insurance-linked securities (ILS) structures, according to Greg Wojciechowski, president and chief executive officer of the Bermuda Stock Exchange (BSX).

One of the Island’s key advantages is its location. “Bermuda sits neatly between two of the biggest capital markets of the world and also two of the largest insurance centres of the world, leveraging that and using our strategic vision to be a niche market, ILS fits very nicely into that,” he says.

“ILS represents this notion of our being an innovative niche market well, because we’ve been able to add value to Bermuda’s reinsurance industry, while continuing to focus on our core mission, which is to drive the modernisation and development of Bermuda’s domestic capital market. That’s what exchange operators should be doing, in their domestic capital markets and internationally, providing support and service to help develop the commercial and product environment.

“In this case the work done illustrates nicely how convergence is happening at many levels.”

According to Wojciechowski, over the past year the BSX has not seen the pipeline of ILS (cat bond) listing change dramatically.

“There are developments occurring in the ILS space, such as collateralised reinsurance usage growing, that said, these vehicles are not typically listed. We’ve seen vehicles that have a collateralised reinsurance aspect becoming more standardised and listing on the exchange—which is good, as that shows continued development of the types of structures being used. BSX has 159 ILS securities listed with an aggregate market capitalisation of $18.8 billion, an all-time high.”

Great support

“We’ve received great support from the market, and I can only say that I’m delighted and grateful. The BSX has spent a lot of time getting to know the market and it’s been really rewarding to see the progress made. ILS is more readily understood, it’s here to stay,” says Wojciechowski. “There will always be alternative capital out there ready to flow into the traditional space and there should be markets and exchanges focused on this to help it happen.”

Given the Island’s sophistication around risk transfer, matched with a world-class infrastructure, robust regulation and a deep pool of expertise, Bermuda has often acted as an incubator for pioneering ideas. When innovation has occurred in the risk transfer industry it has often either been born on Bermuda or eventually moved to and thrived on the Island.

It’s worth pointing out that the evolution of ILS has been 20 years in the making, with the likes of AIG, Hannover Re and USAA involved in the first transactions in the mid-1990s, partly as a response to the devastating effects and high losses stemming from Hurricane Andrew in 1986 and the Northridge Earthquake in 1994.

Now, however, the concept of involving capital-markets investors in insurance-related risks using collateralised policies is rapidly transforming the industry and will continue to do so.

It has opened the Pandora’s box of the trillion-dollar-strong capital markets and let it loose on the risk transfer industry. Everything from a pure-play cat bond to the proliferation of sidecars to structured bonds that shift operating risk into the capital markets are merely logical outcomes of that first relatively simple concept being developed.

Having excelled in the property catastrophe market, Bermuda also invented hybrid ILS models in which funds are aligned with big commercial reinsurers. In this way, Bermuda is recognised as the world hub of such innovation. Some 75 percent of all ILS issued globally, representing approximately $19 billion in assets under management, is listed in Bermuda, comprising all forms of risks from all parts of the world from Italy to China to the US and Canada.

Bermuda’s niche area

“That’s where a niche platform like the BSX comes into play,” says Wojciechowski. “It’s intuitive that if there’s going to be a specialist exchange servicing specialised components of the insurance and reinsurance industry, then Bermuda BSX makes sense as the perfect domicile for that to occur.

“A strong foundation is in place with a well recognised and internationally accepted regulatory framework, mind and management in Bermuda, longevity, expertise, and now the stock exchange’s continuing development and niche focus. It all adds up to a very exciting and developing opportunity.”

Wojciechowski stresses that the ILS sector and its associated companies are using Bermuda for the same reasons such firms have always done: because of its extensive commercial offering, an expert professional services community, stable currency due to parity with the US dollar, and a flexible yet globally-respected regulator that thoroughly understands reinsurance and ILS structures and the concept of innovation around them.

In addition Bermuda has a trump card over other jurisdictions—it’s a safe port of call. Prior to the UK’s vote to leave the EU in June, securing Solvency II equivalence was a big feather in Bermuda’s cap and a badge of credibility it could use to set itself apart from other domiciles—both offshore and onshore. Enhancing that status is the fact that on the other side of the Atlantic, the US National Association of Insurance Commissioners (NAIC) designated Bermuda a ‘qualified’ jurisdiction in 2015—another firm vote of confidence in the Island’s appropriate regulation. Following the Brexit vote, such accolades underscore Bermuda’s long-term stability in an age of uncertainty and change and are very compelling tools for companies reviewing their strategic options in the aftermath of the vote.

Looking ahead Wojciechowski highlights the need for the market to be as forward-thinking as possible in terms of ways to develop the ILS market as a whole. And that might require a bit of a shift in thinking.

“One of the things that we should be saying in Bermuda—and it’s a little bit of a mind shift as it’s human nature to be competitive—but we should also look at collaborative efforts,” he points out. “Are there areas in which we can partner with others? If the current plans in London, for example, encounter delays, can collaboration help both jurisdictions, and more important, the overall market? Does Bermuda have certain fundamental advantages that might not be achievable in the London Market and others? Does the London Market have advantages that might not be achievable in the Bermuda market?

“I believe that everyone in the space wants the overall pie to grow and would be happier for that to happen versus competing for an existing share. Of course it is a competitive world and we understand that, but at this particular juncture with so much uncertainty at so many levels collaboration for continued forward progress and certainty should be something to at least be considered from time to time.”