Bermuda leads in ILS innovation
Bermuda will “keep on keepin’ on” and doing what it is doing when it comes to insurance-linked securities (ILS), says Greg Wojciechowski, chief executive officer of the Bermuda Stock Exchange. Here he looks back at 2018 and forward to 2019 as the jurisdiction continues to work hard to develop and keep its solid platform.
Bermuda has worked hard to position itself at the forefront of the risk management world and has broken away from the pack when it comes to insurance-linked securities (ILS). Time and again, the jurisdiction has proved itself to be an environment that encourages and supports growth and innovation.
The past year has presented some new challenges to the global insurance, reinsurance and ILS industries with the low interest rate environment, a soft market and mergers and acquisitions (M&A) all taking their toll. But Bermuda continues to provide the strength, longevity and expertise that our business partners have come to rely on.
In 2018 the ILS market did not see the rate increases it had hoped for following heavy natural catastrophe losses in 2017. Those losses tested not just the traditional markets, but also the ILS sector. The market, however, proved not only resilient but also willing and able to respond.
In fact, what could have been a crisis instead gave investors confidence in the asset class. Hurricanes Harvey, Irma and Maria, together with the destructive earthquakes in Mexico and the Californian wildfires, were a defining moment for both Bermuda and the ILS sector as a credible risk management resource. Following the significant 2017 losses, there was still interest from existing and new ILS investors and many reloaded for the June 2018 Florida business.
The challenges also presented several opportunities within the ILS sector. The first quarter of 2018 was a record for ILS issuance, signalling that the market had bounced back from the losses of 2017. With more professionals managing ILS strategies than ever before, the market has seen growth in new financial engineering solutions to enable ILS capital to be applied to risks beyond natural catastrophes.
It comes as no surprise that what used to be called “alternative” or third-party capital is now being referred to as “convergence” or “partner” capital, which sends a clear signal that the capital is now a permanent and integral part of the industry. Much of the M&A activity earlier in the year illustrated that ILS was a strategic motivator among acquirers, allowing broader access to alternative capital pools and lower reinsurance costs.
The result is that many of the established companies in the insurance and reinsurance sector are now participants in and partners with convergence capital.
The BSX continues to support Bermuda’s position as ILS leader
Aon Benfield has estimated that the broader alternative capital market space reached $89 billion at the end of 2017. Meanwhile, global ILS issuance at the end of September stood at $11.88 billion, which brought the total outstanding market to $36.6 billion.
The Bermuda Stock Exchange (BSX) will finish the year at a market cap of over $30 billion via 271 listed vehicles. The Island’s global market share of ILS listings currently stands at just over 80%, cementing Bermuda’s continued position as leader in this innovative asset class, with the BSX playing a key role in supporting global market transactions.
As the world’s third largest reinsurance market, Bermuda is an obvious location for the creation, listing and trading of securitised insurance-related structures. Backed up by years of reinsurance experience and knowledge, the Island is now considered the domicile of choice for capital markets looking to invest in securitised risk transfer vehicles.
Bermuda’s emergence as a premier offshore domicile has been decades in the making, supported by all the right ingredients to blend new capacity, new ideas and new talent with traditional reinsurance. The Island’s speed to market, tax treatment, and years of expertise in property-catastrophe risk, catastrophe modelling, actuarial and underwriting are all underpinned by a superior regulatory regime that meets the most robust international standards.
The BSX has supported the ILS space for the last 10 years with the market so far showing a measured pace of development. The majority of BSX-listed ILS vehicles are property-catastrophe risks, but the ILS market is starting to penetrate other exposures and exhibit regional diversification—for example, the BSX has listed bonds on the exchanges that cover Turkish earthquakes and Chinese-related catastrophe risk.
ILS and the global protection gap
The measured and mature pace of growth in the ILS market has created an environment where global capital markets have become more comfortable with ILS as an asset class and as a strategic part of their investment portfolio. This presents an interesting opportunity for capital market-based structures to provide cover for some of the least insured or hardest to insure risks in the world.
The ILS market is in a prime position to help close the protection gap that exists in the insurance markets and to drive more capital to areas in the word where insurance is most needed. Swiss Re has estimated that the protection gap—the proportion of natural catastrophes that are non-insured—is at least $180 billion. As the protection gap grows and climate change increases, there will be growing opportunities for ILS to create solutions for these risks.
Emerging markets are becoming more dominant, and we can predict that there will be increasing commitment among governments, industry, financial markets and stakeholders to work together. Bermuda has a proven track record of agility and flexibility, which means that it is positioned to continue to be an innovator for insurance and reinsurance risk.
The BSX has evolved during its 10 years working in the ILS space and the market has changed almost beyond recognition—ILS has forever changed the way the reinsurance market thinks about capital and has presented new and more efficient ways to transfer risk.
The BSX will continue to develop our solid platform for the creation, listing and trading of securitised insurance-linked instruments, while looking to see where we can use collaborative forces and additional support to grow our business.
Bermuda, ILS, innovation, BSX, Greg Wojciechowski