Resilience and sustainability goals drive interest in ILS
Hurricane Dorian was an unprecedented storm that decimated parts of The Bahamas. Wildfires ravaged California and Australia, already reeling from several years of drought. Typhoons Faxai and Hagibis made landfall in Japan, causing some of the worst flooding in living memory. The year 2019 will be remembered as a year of climate turbulence.
“The government of Bermuda and the BMA are also pioneering regulation and oversight of the emerging fintech market.”
During the last few years the market for pandemic insurance products has been a topic of discussion but participation has been limited—something that may well change in 2020.
As climate change progresses, we will undoubtedly see the insurance and capital markets playing an increasing role in mitigating the associated risks and providing communities around the world with restoration from current events and resilience against future perils.
Mitigating the effects of a changing climate has been the major topic of conversation for the banking industry, asset managers, governments and the United Nations (UN), and was the headline topic at the World Economic Forum Annual Meeting in Davos in January.
There was a secular shift in our industry in 2019 that is sure to continue into 2020. A range of topics are being discussed, from consolidation, excess capital, and climate change, to new emerging tech-driven business models, and many more.
Bermuda has a history of capitalising on market shifts and is uniquely positioned to find solutions for natural catastrophes, weather risk transfer and the protection gap. Our established infrastructure, intellectual capital and track record will enable us to be a natural home for the coming transformation of the industry—where a more efficient transfer of risk is enabled by technology, analytics and capital working together.
The market looks to this efficient capital base to solve some of the world’s biggest and most challenging risks. The collateralised reinsurance and insurance-linked securities (ILS) markets are positioned to reduce the amount of uninsured or underinsured risks throughout the globe—which the industry has coined the ‘protection gap’—estimated at $180 billion.
Addressing this protection gap, and helping vulnerable communities build resilience and sustainability, is attracting increasing interest in ILS and other structures that comply with environmental, social and governance (ESG) standards, and the UN’s Sustainable Development Goals. Institutional investors, such as pension funds, are particularly interested. This promises further investment in the ILS market in the foreseeable future for risk solutions that facilitate sustainability.
The securitisation of short-tail lines of business other than property-catastrophe (such as terrorism, cyber and auto) also offers the ability to diversify risk by peril, while narrowing underinsurance or growing risk. With a sophisticated investor base, growing the pie and diversification are met with interest and collaboration between insurance and capital markets which will promote innovative solutions for big challenges.
Strong future
In 2019, the Bermuda Monetary Authority (BMA) showed once again that it is a mature and forward-thinking regulator by expanding the licensing of insurance and reinsurance classes of business. Late in 2019 the BMA introduced a new Collateralised Insurer (CI) class as a result of the increasing scope and sophistication of the ILS and collateralised re/insurance market, including more complex structures and deals.
The government of Bermuda and the BMA are also pioneering regulation and oversight of the emerging fintech market with the passing of the Digital Assets Business Act (DABA), which is opening Bermuda’s doors to what will be the next wave of innovation in our industry, digital platforms and assets.
Bermuda’s history is built on a proven track record of innovation and collaboration between business, government and regulator that has enabled us to drive risk innovation and be the leading domicile for global ILS.
Since the inception of Bermuda’s special purpose insurer legislation what used to be called ‘alternative’ or ‘third-party’ and then ‘convergence’ capital, is now referred to as ‘partner’ capital. It is an integral and permanent pillar of the industry. Many of the established companies in our insurance and reinsurance sector are active participants in the sector.
Bermuda remains at the forefront of ILS. In 2010, the total value of ILS listed on the Bermuda Stock Exchange (BSX) was $1.7 billion. Less than 10 years later, at December 31, 2019 the total number of ILS securities listed on the BSX stood at 401 with a combined nominal value of $34.72 billion.
At year end 2019 the total nominal value of the global ILS market was $41 billion, reaching a new year-end high, with the BSX ILS listings representing some 84.68 percent of the world market in nominal value terms. The BSX also attracts listings from other jurisdictions, a testament to the strength of the Bermuda market, tried and tested infrastructure and exceptional client services.
The BSX stands to benefit from the new partnership with Miami International Holdings (MIH), the parent holding company of the MIAX Exchange Group, which acquired a majority ownership of the BSX in late 2019. With this new partnership, we intend initially to focus on growing BSX’s existing debt and ILS listings by offering a competitive exchange venue as well as enhancing BSX sales and marketing efforts and actively pursuing new opportunities and innovative products.
2020 promises to be a transformative year for the ILS market and Bermuda and the BSX will remain at the forefront as the centre of excellence for the creation and listing of ILS vehicles.
Greg Wojciechowski is president and chief executive officer at the Bermuda Stock Exchange. He can be contacted at: gwojo@bsx.com
