Bermuda’s USP in ILS

Third party capital is becoming an increasingly prominent component of the Bermuda landscape, driven by legislative change, active lobbying and the appeal of critical mass.

Having captured 40 percent of 2012’s global ILS issuance, Bermuda is going great guns in the alternative space. Bermuda:Re spoke with Greg Wojciechowksi, president and CEO of the Bermuda Stock Exchange and Kathleen Faries, spokesperson for ILS Bermuda and CEO of Tokio Solution Management about the strength of Bermuda’s offering in the ILS space and why the Island’s ILS industry is gathering pace.

Greg Wojciechowksi

The BSX has achieved considerable success in attracting ILS business. What has been key to its ongoing success?

The key to the success of both Bermuda and the BSX is the market’s recognition and understanding of the depth of the experience Bermuda has in both the reinsurance and the ILS space. Important enhancements and developments to the service infrastructure and regulatory framework which underpins our clients’ business has been a critical business driver. In addition and as important, is Bermuda’s longevity in the insurance business, the critical mass it has achieved over the years and the depth of its service infrastructure. The BSX is a well established and recognised exchange and we have been proven that we understand our client’s commercial needs while guarding the important fundamental functions of market regulation and oversight. In essence, we have committed to making Bermuda the ILS centre of excellence. The BSX now has 41 securities with a market capitalization of over $6.5 billion.

How has Bermuda overturned the initial critical mass achieved by Cayman in the ILS space?

Our success comes from listening to the market and our clients, making changes where and when necessary to ensure that our product support is commercially sensible and encourages the continued development of the ILS asset class.

A number of state-backed pools have opted for the BSX in recent months. What is encouraging them to opt for the BSX? How are you looking to build further interest among such entities?

I suppose it is the fact that BSX is an internationally recognized exchange. The BSX is the only offshore exchange that is a full member of the World Federation of Exchanges to name one of the many international associations we have established to date. The BSX has supported our domestic capital market and international products for over 40 years and thus we know what is necessary to support existing and new securities and asset classes. Going forward, we will continue to engage potential clients in the market so that they are kept abreast of important developments taking place in Bermuda and at the BSX as it relates to our support of the ILS product area.

What steps are the BSX and the Bermuda market taking to further strengthen its position within the ILS space? What more could be done?

We are going to continue to listen to clients’ needs and support a product that is cost and market competitive. We will continue to expand our market outreach and be as flexible as we always have been. One example of this is a Bermuda-based initiative that has created the ILS Bermuda Convergence 2013 conference in November this year. This will help further promote our offering to the right audience.

Kathleen Faries

What steps is the Bermuda market taking to further strengthen its position within the ILS space? What more could be done?

Bermuda has taken many steps in the past couple of years to strengthen its position in the ILS space. The special purpose insurer (SPI) framework that was introduced in 2009 streamlined the incorporation and setting up of cat bonds in Bermuda, which ultimately reduced the cost as well. There has been a tremendous increase in the use of SPIs in Bermuda over the last three years. In 2012 40 percent of the total new issuance of cat bonds were issued out of Bermuda. The BSX has a current aggregate cat bond market cap of $6 billion which is around 40 percent of the total global issuance. We are growing our statistics each year and fully intend to be the premier domicile for ILS as demonstrated by the organization of ILS Bermuda and the Convergence 2013 conference to be held on November 14th this year.

Is third party capital the latest ‘Class’ for Bermuda?

There is no doubt that since Bermuda is already a leader in the sidecar, cat bond and collateralised reinsurance space that the centre of all of this convergence activity will be Bermuda. We have already seen this through the increase in sidecars, reinsurance linked investment managers and funds, and reinsurer managed third party capital investment platforms all coming out of Bermuda.

Is a third party complement to the traditional portfolio – one that generates fee income and is light on the balance sheet – emerging as the dominant approach for Bermuda players, particularly those with a cat focus?

I think there will be pressure on traditional reinsurers to explore how they can access third party risk free income.  There is no doubt that the influx of capital into the reinsurance market will change the economics of taking reinsurance risk.  Reinsurers, unlike collateralised reinsurance operations, have a hefty expense burden in order to meet all the regulatory and rating agency requirements. Rate peaks will flatten post event and as we are already seeing, rates are trending down.  All of this will put pressure on traditional reinsurers to look for fee income to supplement their risk based profit. Sidecars appear to be the predominant approach for reinsurers at the moment; however I am sure there are several exploring bringing a reinsurance-linked fund to market as well. The question that remains is just how all this capital will be deployed and who will be successful in changing their capital and profit model.