Staying one step ahead

Scanning the insurance-linked securities (ILS) market, it is obvious how popular this niche has become. The competition for ILS business has intensified in recent years as more domiciles have started to target the sector—expanding the choice of where sponsors can place their securitisations.

More established players such as Bermuda, Guernsey, the Cayman Islands and Dublin are now facing strong competition from other domiciles which have set their sights on ILS, with most recently the UK government seeking to lure one the fastest-growing parts of the
re/insurance business to London.

Bermuda has watched with keen interest since 2016 when London announced its ambitions to become an international ILS hub. Since then, a new regulatory framework and exemptions from corporation tax for the sector are among the proposals put forward by the UK Treasury and the Bank of England. While Bermuda dominates the global catastrophe bond business, it would have been irresponsible not to keep a watchful eye on developments in the UK capital—after all, London’s pedigree as a top insurance and reinsurance hub speaks for itself. Its history, depth of talent and reputation will make it an attractive jurisdiction for many global firms.

Bermuda and London have been working hand in hand for many years, supporting each other’s growth. Bermuda insurers and reinsurers have historically partnered with Lloyd’s of London, relying on the city’s reputation and history to help Bermuda carriers establish credibility and gain access to the markets where barriers exist.

Meanwhile, Bermuda insurers invested £3.6 billion ($4.7 billion) in shareholders’ funds to 16 UK insurers in 2015, according to the Association of Bermuda Insurers and Reinsurers (ABIR). ABIR members and other Bermuda insurers account for 24 percent of the Lloyd’s premium volume and Bermuda’s insurers have contributed more than 50 percent of the estimated loss payments for some large European insurance events.

A global boom

The Island has done a great job of keeping in touch with the market’s realities and has worked hard to evolve with the changes in the sector, balancing innovation and discipline in order to support the global risk markets, as well as making them more competitive.

Bermuda has been at the forefront of the global boom in ILS investment, with the Bermuda Stock Exchange (BSX) recording a record number of ILS listings in 2016: 61 in total, with a capitalisation value of $6.2 billion, including several new variable rate note programmes and 19 new notes under established programmes. As of June 2017, there were 218 listings, a second equal increase of 16 percent, taking the overall value of securities from $21.2 billion at year’s end to $24.5 billion half way through 2017.

The record 218 ILS listings on the BSX include catastrophe bonds, private catastrophe bonds or cat bond lite structures, other private ILS, collateralised reinsurance sidecars and two listed reinsurance-linked investment funds.

According to the Bermuda Monetary Authority (BMA), ILS issued from Bermuda represented 73.9 percent of total outstanding capacity at Q1 2017. We see London’s interest in the ILS market as a validation of Bermuda’s decision to promote ILS.

Competition was always inevitable in an industry in which Bermuda has enjoyed so much success for nearly a decade. The Island was one of the first jurisdictions to embrace the creation, support and listing of ILS structures and it is now the number one domicile and leading centre of excellence for this business with the greatest global market share of ILS.

The popularity of so-called ‘alternative risk transfer’ and ILS in recent years has led a fundamental shift in the way the reinsurance sector operates. While it has presented some challenges for an industry that has always prided itself on strong client relationships, it has also spawned creativity and innovation. Rather than seeing alternative capital as a direct challenge to its reinsurance business, Bermuda set up funds for third parties to invest in catastrophe risk, and it is supporting the fund managers who are taking the next step of setting up their own reinsurance companies.

This was illustrated in 2009 when the BMA paved the way for the Island’s emergence in this sector by amending legislation to make it much simpler to create special purpose insurers (SPIs)—the vehicles used for setting up ILS. By the end of 2010, a total of eight SPI licences had been issued, and this number had grown to 176 by the end of Q1 2017.

It is no surprise that Bermuda has embraced such innovation, given the Island’s record of expanding out of a need for improvement and modernisation. The Class of 1992 companies were a direct response to Hurricane Andrew, meeting the demand to start a new breed of reinsurers offshore to reduce costs by having a more capital-efficient structure. Since then, Bermuda has emerged as a premier offshore domicile and is now considered the mainstream and accepted model for startups, as well as being the world’s third largest reinsurance market. The aspiration is to do the same for the ILS sector.

Bermuda has done this by ensuring its infrastructures are strong and sound, and that its regulatory standards are fit for purpose. The Island has a highly-regarded regulatory framework, a sophisticated legal system based on English law, mature infrastructure, and global companies with physical presence. Bermuda has worked hard to create a reputation as a quality jurisdiction that has continuously shown the ability to respond to changes in market conditions.

Bermuda will face stiff competition from the other domiciles active in the space or targeting ILS, but the jurisdiction has had a sustainable and effective head-start with its existing infrastructure, expertise and experience. Meanwhile, the BSX has been working hard to gain traction in Europe, and the recent listing of Generali’s $200 million Lion II Re catastrophe bond proves that sponsors are looking to Bermuda from across the pond.

As jurisdictional competition evolves, so will Bermuda’s support of the asset class. The BSX expects its role in supporting the global ILS industry to deepen as centres such as London come on line. The BSX sees itself being able to provide solid exchange support to deals emanating from the UK market as well as other international jurisdictions such as Cayman, Dublin and Guernsey.

Greg Wojciechowski is president and chief executive officer of the Bermuda Stock Exchange.