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Bermuda has solidified its place as the go-to location for insurance-linked securities in recent years, according to Brad Adderley, corporate partner at offshore law firm Appleby.
Insurance-linked securities (ILS) are collateralised products. They are all linked to some kind of collateralised security—whether it’s a contractual security, a note, or a preference share, it’s linked to something concrete.
In Bermuda we started off with ILS being a ‘mom and pop’ captive in the 1990s. People said ‘I can’t have my own captive because I don’t have at least one million dollars in net premiums’, which at the time was the premium threshold needed to have your own captive. So what did they do? They rented a cell from a rent-a-captive or a transformer or an ILS platform from one of the insurance managers.
At the time insurance managers had a separate account/segregated account, like a class 3, which wrote business on a fully collateralised basis. This was because the business they wanted to write wasn’t big enough, it didn’t make commercial sense. Those programmes grew over time and then became captives themselves. That was the beginning of ILS in Bermuda, but purely on a simple, tiny basis.
With the advent of the commercial carriers in Bermuda we got into sidecars. They again were a collateralised product and from 2005 to 2007 they were done predominantly in Bermuda because of an ideal environment for innovation. When you have the sponsors, the investors and the expertise around you, why would you go anywhere else but Bermuda?
The birth of cat bonds
The only ILS platform or collateralised product that Bermuda didn’t have at that time was cat bonds. In response, we created special purpose insurers (SPIs) which helped to create and attract cat bonds to Bermuda.
SPIs were a more efficient vehicle for cat bonds and all other collateralised products: transformer vehicles, transformer platforms, sidecars and so on. Bermuda then had a better structure and platform and we were able to attract cat bonds from other jurisdictions such as Dublin and Cayman.
Bermuda became attractive through a number of ways. First, we got Bermuda sponsors to be loyal, to use Bermuda for their cat bonds. Second, Dublin was struggling and getting things wrong sometimes in the cat bond market, so people were saying ‘let’s look at the Irish issuance, look at those companies and try to get them to come to Bermuda’.
Third, we said ‘let’s get half of the new issuance, the people who have no experience of what we can do, and attract them to come to Bermuda’. With these acts Bermuda gained traction and because of that, we have been able to grow the ILS market here on the Island to what it is today.
People don’t appreciate that the ILS market has been here on the Island for a long time, in different forms. What we are doing is making sure that we are attracting as much business as possible and not sharing with our competitors.
Nowadays, you might be doing a reinsurance deal with someone else already in Bermuda. Many of the investors who buy the notes, preferred shares or other financial instruments, might be in Bermuda. We are a one-stop shop—everything you need to survive is here, we have what the market needs, all on the Island.
Dealing with regulation
Today there’s more competition and like a lot of things in life it’s true to say that competition makes you stronger and better. But with success comes criticism and attention and the question becomes, how do we respond to that attention? There are always overseas regulators who are coming to the Bermuda Monetary Authority and saying ‘how do you do this, what makes your structure work?’. What we need to do in Bermuda is defend our view and our regulation and not change because of overseas pressure, because what we are doing is correct.
Many of these overseas regulators are talking to Bermuda, viewing our systems and being critical of this country because of our success. Just because one jurisdiction has set up a structure in a particular way, that doesn’t mean it’s the right way. We should be able to look at all the other jurisdictions we compete with and be flexible enough to say that we will do the best we can to pick the best things from each jurisdiction in order to have the best regulation in Bermuda.
It’s crucial to have the right regulation but that does not mean too much regulation. You don’t need to have the most over-regulated jurisdiction, you need the most efficient regulation for the desired structures. That’s a fine line to tread and it’s a difficult task for any regulator.
Everyone has a choice about where to go—Bermuda, Ireland, Malta, or wherever. As a result of having a choice, what are we going to do to ensure that their choice is Bermuda? Continue to innovate and regulate intelligently.
If you know there’s competition out there, with some people doing things differently, there’s the temptation to introduce more regulation, which ends up being too much and not conducive to business. Bermuda has to tread that fine line to stay successful—and welcoming.
Bermuda, ILS, Appleby, Brad Adderley, insurance-linked securities