The dominant force in ILS
What are the latest stats on the BSX’s market share in ILS?
Bermuda is the world’s leading jurisdiction for insurance-linked securities (ILS). Of the 1,012 securities listed on the Bermuda Stock Exchange (BSX), ILS accounts for 381 listed issuers with $34.5 billion in market capital outstanding.
The ILS market recently passed $40 billion in issuance following double-digit growth in the past year. Clearly the appetite for this market continues to grow.
We have also recently seen comments from other ILS markets in Europe that they expect ILS growth to continue during the next year—a trend we at the BSX are certainly seeing.
Why are deals originated in London and Singapore still being listed on the BSX?
It’s clear from the activity level in the market, and interest from investors, that the capital market continues to be interested in the ILS asset class. This is evident from the increase in the number of ILS vehicles that have chosen Bermuda as their location of domicile and the BSX as their international exchange listing venue of choice.
The BSX is at the epicentre of ILS listings and has been the market leader in this space since the Bermuda special purpose insurer (SPI) legislation was introduced in 2009.
Bermuda also has the advantage of being home to some of the largest ILS investment fund managers and sponsors. Our market has achieved a critical mass that leads to deals in other parts of the world naturally migrating to Bermuda platforms.
The Island has developed a custom, built-for-purpose jurisdiction around this niche insurance space—it is part of our business DNA. Stakeholders including re/insurance carriers, world-class service providers, regulators and the BSX all work together in developing and supporting this space.
The BSX will continue to work with and support this maturing asset class as the risks being transferred diversify. For example, the BSX can assist with secondary market price discovery, trade and post-trade backing. This continued evolution of the market will go a long way in helping to narrow the ‘protection gap’ that exists today—the non-insured natural catastrophe exposure around the world—which is a challenge for developed as well as emerging economies. Early in 2018, Swiss Re estimated that the global protection gap for weather-related risks is at least $180 billion.
What are the main advantages of using Bermuda and the BSX?
Over the last 70 years, Bermuda has developed a reputation for excellence in risk transfer and innovation and has the infrastructure, as well as the technology, to serve a global client base. The devastating string of natural catastrophe events in 2017 and 2018 demonstrated Bermuda’s resilience, its tried-and-tested infrastructure and its expertise in the property catastrophe market.
This reinforced Bermuda’s leading global position, longevity in the market and natural choice for insurance-linked vehicles.
One of the main advantages of Bermuda and the BSX is speed to market—we have a more efficient and less expensive listing process than other exchanges. The BSX is a regulated, recognised exchange and we have been active in the ILS space for almost a decade. Bermuda is recognised as a world leader in insurance regulation as evidenced by Solvency II equivalence and National Association of Insurance Commissioners (NAIC) recognition.
For European clients, a BSX listing permits the issuer to take advantage of the quoted eurobond tax exemption. The BSX is also ideally located between the US and EU—offering visibility in two huge capital markets.
How is the nature of the ILS market changing?
Continued education and awareness of the ILS asset class, and its non-correlating features with the financial markets, will remain of interest to institutional investors and fund managers. This diversification suits those investors who are looking to improve risk-adjusted returns and have an appetite for alternative investments.
As we see more volatility in global markets and a low interest rate environment, the interest in allocation to truly low-correlated assets like ILS should continue.
Emerging markets and developing nations will provide additional opportunities to develop new ILS and weather risk transfer products and solutions as gross domestic product growth occurs. Increased weather risk related to climate change as well as the growth in the protection gap provide more opportunities for ILS and innovative risk transfer solutions to manage these risks.
As emerging markets gain prominence with leading global markets, we see the desire for governments, industry, financial markets and stakeholders to work together. With an established track record of agility and flexibility, Bermuda has demonstrated its leading role in risk innovation and a solution-oriented approach, which will naturally attract ILS ventures.
In the last few years ILS capacity has migrated from private equity investors to family offices and now to pension funds—some of which have acknowledged ILS as sustainable development investments. This migration has accelerated in the 10 years since the financial crisis as pension funds globally realised that many assets previously considered as low-correlating assets were in fact not, as well as the growing maturity of the ILS market.
This migration has been from capital providers with higher, equity-like costs of capital to lower cost capital providers and has been driven by the ILS market’s maturity in three main ways. First, the asset class was tested in 2011 and substantially in 2017 and 2018 by loss events.
Second, there has been substantial growth in ILS assets under management over the period as well as an increase in managers of ILS strategies, consultants and others focusing on the asset class.
Finally, financial engineering techniques have been developed to allow access to other exposures besides natural catastrophes including mortgage risk, operational risk and other innovative covers through cat bond issuances by the World Bank. The investor community will also benefit from increased diversification by peril and geography.
Simultaneously, there will be a greater pool of capital provided by ILS funds and investors seeking to access the non-correlating features that can be accessed from re/insurance exposures. This evolution will result in mainly idiosyncratic re/insurance risks being held by re/insurers with efficiencies in transformation techniques resulting in ILS capacity assuming more severity risk that is seen to have a low correlation to the broader financial markets.
What we are hearing from the market is that reinsurers desire simplification and continue to look for efficiencies, innovative products and digital transformation. It’s also clear that collateralised reinsurance will continue to provide a greater portion of retrocessional capacity to the reinsurance market.
What role might the BSX and Bermuda play in this?
On August 5 this year the Bermuda Monetary Authority (BMA) introduced a new collateralised insurer (CI) class. In a consultation document, the BMA explained that the new classes of CI and limited purpose insurer (LPI) are the result of the increasing scope and sophistication of the ILS and collateralised re/insurance market.
The BMA said the new classes are to cater to the evolving market which involves more complex structures and deals including using leverage and transacting with a greater variety of cedants including unrated non-affiliated cedants.
The BMA explained that Segregated Account Companies had traditionally been classified as class 3 insurers and as a result, a number of insurers providing collateralised property catastrophe insurance have been identified in this insurer class.
The BMA is of the view that these new insurer activities are not as appropriate for the SPI or class 3 regulatory frameworks and a more appropriate, fit-for-purpose regime than the standard commercial regimes (classes 3A, 3B and 4) has been established to respond to an evolving and mature market.
Bermuda and the BSX remain at the forefront of the ILS market evolution.
Greg Wojciechowski is the president and chief executive officer of the Bermuda Stock Exchange. He can be contacted at: gwojo@bsx.com
