Bermuda ILS: Strength in diversity
Bermuda’s insurance-linked securities regime provides a wide array of options for all parties.
Bermuda’s insurance-linked securities regime provides a wide array of options for parties interested in collateralised insurance and reinsurance transactions, writes Alexandra Macdonald, a director at Conyers.
Bermuda has long been a favoured jurisdiction of both cedants and investors for setting up ILS structures.
The special purpose insurer (SPI) vehicle, first introduced in 2008, has been well established as the ideal structure for cat-bond transactions. Focused on efficiency and trusting on the sophistication of the parties, the SPI class was specially designed to allow for a near effortless transfer of risk. As a result, Bermuda has become the hub for these transactions and there continues to be significant growth in the number of sponsors and investors looking to benefit from the Bermuda SPI.
While catastrophe bonds continue to be an in-demand ILS solution, Bermuda’s ILS regime provides a wide array of options for parties interested in collateralised insurance and reinsurance transactions. Most notably, with the introduction of the Collateralised Insurer class, the space continues to evolve and adapt to the demands of the industry.
Cat Bonds – The Variety Pack
For over a decade, cat bond transactions have led the way within the ILS sector. The Bermuda SPI was tailormade for these transactions, allowing for an efficient offload of risk by cedants. Consequently, we have seen sponsors regularly return to the Bermuda ILS solution, in some instances repeatedly with back to back issuances through their established programmes. These sponsors continue to find value with their vehicles as a method of transferring risk and raising capital, using Bermuda’s well-established structure.
While deals have historically focused on property catastrophe risks, there has been a steady expansion into non-property, non-life risks. In the 2010s there was a wave of mortgage insurance bond deals and of late, we have seen a steady stream of new sponsors looking to enter the market with a pipeline of deals steadily growing from 2023 and continuing into 2024. Most notably, the recent growth of cat bonds covering cyber risk has heralded a new territory. By trusting in the sophistication of the parties while being able to be responsive and efficient, the Bermuda cat bond market has proven itself able to provide a diversity of opportunities.
Sidecars – The Direct Approach
As sponsors have become more sophisticated, so have investors. There has been a growing demand for ILS sidecars, often the result of key investors looking to have a more direct involvement in the structuring and long-term strategy of the vehicles. We understand that investors view them as an attractive investment vehicle, while for sponsors they allow for a more innovative risk transfer solution. The structures are seen as a way of enhancing a sponsor’s risk retention and capital diversification strategy while allowing investors to participate on a proportional basis. These more complex SPIs are therefore often best set up by sponsors able to provide strong underwriting expertise and willingness to build a direct investor relationship.
The basic sidecar structure involves licensing an SPI that is also registered as a segregated accounts company. Investors subscribe for preference shares or notes linked to their own dedicated account. As each investor has its own “cell”, this allows the parties to tailor for specific needs. It is therefore common to see the sidecar structure also be the vehicle of choice for investors new to the space. As it can be set up as a short-term vehicle tailored to specific needs, it provides new investors with the opportunity to learn the ropes. As the vehicle progresses and investors and cedants become comfortable with the programme, the structure can then be further adapted for long run renewals and rollovers.
The Unrestricted SPI – Beyond the Basics
While most Bermuda SPIs are set up to be restricted to entering into contracts of reinsurance with a specifically named cedant, some sponsors may seek the flexibility of engaging with a number of different cedants. For these sponsors, the unrestricted SPI provides an opportunity to use the basic building blocks of the Bermuda SPI while writing multiple transactions with different parties. While deals must still be fully collateralised, the limited conditions on the licence allows for sponsors to utilise the vehicle for many parties. This class is most commonly used by experts in the ILS field as a stepping stone to the more complex collateralised insurer or class 3 commercial insurer classes.
Collateralised Insurers – The New Complexity
In 2019, it was recognised that while the Bermuda SPI model was a highly efficient alternative risk transfer solution, it did not always meet the demands of the growing scale and complexity of certain deals. In recognition of this subtle shift in sophistication, the BMA, collaborating with industry, consequently introduced the collateralised insurer class (CI). The CI was established as a way to bridge the gap of the streamlined SPI model and the more involved commercial insurer classes. While SPIs, both restricted and unrestricted, were designed for specific transactions, the collateralised insurer allows for a wide array of transactions using the fully funded model without the additional regulatory requirements applicable to the commercial classes. This class is designed to cater to more complex deals by, amongst other things, allowing for part of the collateral to be funded by purchasing outward reinsurance, greater investment risk in line with commercial peers and allowing for more involved structural mechanics such as claw backs. Currently, this class is adopted mainly by those with significant experience in the ILS space, but we expect to see further expansion into this space as parties become more familiar with the structure and its requirements.
Conclusion
Bermuda’s ILS structures have proven to be nimble and adaptable to the needs of sponsors and investors. The growing diversity of solutions available within the ILS landscape in Bermuda reflects the jurisdiction’s response to an innovative and ever evolving ILS industry. This diversity also allows both sponsors and investors ample opportunity to find the model that is right for them. As a result, Bermuda continues to be a jurisdiction of choice within in the ILS market.
Alexandra Macdonald is a Director in the Bermuda Corporate practice. Her practice includes all aspects of corporate and commercial law in Bermuda, with a focus on insurance and investment fund law and regulation.
She specialises in incorporating and licensing insurers and reinsurers, including captives, special purpose insurers, sidecars and segregated account companies and in the creation and offering of cat bonds. She has advised on the formation, licensing and listing on the Bermuda Stock Exchange of numerous cat bond special purpose insurance vehicles. She also has expertise in establishing investment funds, including hedge funds, private equity vehicles, closed ended funds, and master and feeder structures.
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