11 April 2013ILS

BSX: a centripetal force

Back in 2009 it would have been hard to imagine how much of the global market in insurance-linked securities (ILS) would have been captured in just over three years. The Island, which had already established itself as the world’s third largest insurance and reinsurance centre after London and New York, was behind the curve when it came to these specialist risk vehicles.

While ILS such as catastrophe bonds, industry loss warranties (ILWs) and sidecars had all been formed here, legislation needed to be streamlined to make the incorporation of special purpose insurers (SPIs)—which are used to form these ILS—simpler and quicker. In 2009 legislation was drafted by the Bermuda Monetary Authority (BMA) and passed by the Bermuda government to do exactly that, and new capital started to flow to the Island.

Shelby Weldon, director, licensing and authorisation at the BMA, said that the change in legislation has resulted in Bermuda emerging as a leading centre for the global ILS market. He indicated that global ILS market capitalisation in 2012 was $6.4 billion, of which Bermuda issued $2.5 billion, or 40 percent of global issuance. This figure was up from both 2011 ($1.6 billion) and 2010 ($1.2 billion).

In 2013, Bermuda boasts 40 percent of the global ILS market and the Bermuda Stock Exchange (BSX) is increasingly becoming the exchange of choice to list such vehicles. In fact the BSX now records listings with a market capitalisation of nearly $6 billion. Within the context of worldwide market capitalisation, which Aon Benfield put at $14.9 billion by the end of 2012, this is a pretty sizable figure.

Bermuda has certainly earned its place at the table. Bermuda reinsurers write 15 percent of the aggregate global reinsurance premiums and supply 40 percent of broker-placed reinsurance in the EU and the US. It was natural that in 2008, the BMA sought to support the growth of ILS through positive changes to its SPI legislation. Since then we have seen robust business in the ILS space on the BSX, and from this standing start, the BMA has registered 65 SPIs to date, of which 58 are currently active.

Given the importance of Bermuda in the global reinsurance industry and the platform that the BSX has created, Bermuda and the BSX is the logical place for the insurance and capital markets to converge. The BSX is continuing to actively work with participants in the secondary market to expand exchange support to the asset class.

For some time Bermuda has been at the centre of the provision of fully collateralised reinsurance solutions to facilitate investments in reinsurance capacity, and Bermuda is leading the way when it comes to “Bermuda is leading the way when it comes to the use of SPIs for both cat bonds and other collateralised transactions by sophisticated participants.” the use of SPIs for both cat bonds and other collateralised transactions by sophisticated participants. Bermuda has several dedicated reinsurance-linked asset managers and other related businesses are setting up offices in Bermuda to be close to the reinsurance market and to take advantage of the expertise and industry knowledge offered in Bermuda. There are also various service providers in the space that are building up knowledge to support and lead the growing collateralised market.

Going forward, the importance of Bermuda in the global reinsurance, insurance and risk transfer markets will continue to evolve. Historically Bermuda has always been at the forefront of creating new products, of being entrepreneurial in its outlook, and of seeking to help the global re/insurance market develop and evolve.

As the world’s risk capital, Bermuda will continue to develop products and services which support the market’s needs. That is what has made us successful so far and it will allow Bermuda to continue to be a world leader in risk transfer markets.

Market snapshot

The catastrophe bond market closed 2012 with $14.6 billion on a market value basis between the 115 cat bonds that make up the Swiss Re global cat bond indices. The Swiss Re cat bond performance indices’ global total return index reported a 10.28 percent return for 2012.

Aon Benfield Securities’ annual review of the catastrophe bond market said that the year ending June 30, 2012 “was a healthy period for the ILS market” and was characterised by an acceleration in annual issuance sparked by increased sponsor interest as well as strong investor inflows.

The report added that annual issuance volume reached $6.4 billion—an increase of more than $2 billion over the same period in 2011—while at year-end, total bonds at risk stood at $14.9 billion, an increase of $3.4 billion from the previous year.