Carving a niche
In 2014 a number of domiciles have specifically targeted the insurance-linked securities (ILS) space either by introducing new, bespoke, legislation as Gibraltar has done, or by simply upping the ante in terms of marketing activities.
However, the success of each in attracting these types of deals will be reliant on their finding a niche in the market.
For risks being transferred for US perils, the Cayman Islands and Bermuda continue to battle it out to be the domicile of choice for cat bonds, transformers and collateralised reinsurance-type deals. However, both will need to enter 2015 with a strategic plan, as Shaun Geils, ILS manager at Kane explains.
“We’re seeing a pick-up in the number of domiciles entering the ILS market. In one year we’ve seen the Isle of Man, Malta, Gibraltar and Guernsey target this sector, which definitely gives the perspective of how much ILS is growing,” he says.
“While competition is always a good thing, from an ILS perspective, the domiciles need to brand themselves and differentiate—so it might be interesting to see how this happens between the traditional domiciles and the new ones.”
Gregory Wojciechowski, the Bermuda Stock Exchange’s (BSX’s) president and CEO agrees that differentiation is important, but describes these new offerings as “imitations”, saying that that given Bermuda’s success, he is not surprised by the new ILS hubs.
“It’s a natural evolution that when you have one jurisdiction or product area that’s really solid, successful competitors will see an opportunity,” he says.
“Imitation is the most sincere form of flattery, and we are inevitably are going to see these different jurisdictions try to get into this space. We watch it cautiously—as we should—but we take a bit of comfort in the strength and depth and base of knowledge that’s in Bermuda.”
The BSX has now exceeded 100 ILS structures on its list, with an aggregate market capital of $13 billion. This means ILS now represents a seventh (14 percent) of BSX’s overall official listings—a record for the exchange.
“Such impressive figures demonstrate the strength of the exchange and the benefits of Bermuda as a domicile in the face of increasing competition in the market,” says Wojciechowski.
He also says that Bermuda is a tried and trusted jurisdiction in a variety of different aspects of specialty reinsurance and reinsurance support, which is an appealing concept.
Speaking of the region’s ability to innovate and remain ahead at the forefront of developments, Wojciechowski says that while others may try, it will take a substantial time to reach the level of expertise hosted in Bermuda.
“Over the decades the market has been an innovator, and a thought leader in terms of creating new products. While there may be some traction with other jurisdictions, to replicate the degree of experience and knowledge that resides there will take time,” he says.
“The participants in this market want to work with those that have been there for the long haul and have the understanding of the market. We know our product and are confident in it—but there’s nothing like a dose of competition to keep everybody on their toes.”
Many agree that Bermuda is a very attractive hive of ILS activity, and expect this level of interest to continue.
Wojciechowski says that Bermuda will continue to emerge as a centre of excellence in the ILS space and adds that this development is intuitive because of Bermuda’s longevity in the insurance business, its infrastructure and regulatory framework, which is moving towards Solvency II equivalence.
Jed Rhoads, president & chief underwriting officer, reinsurance, Markel Re agrees. He says that Bermuda’s preeminent position as an ILS domicile is due to many factors, and that the combination of those factors is not currently found in any other single jurisdiction.
“Imitation is the most sincere form of flattery, and we are inevitably are going to see these different jurisdictions try to get into this space.” Gregory Wojciechowski
“There are many types of ILS entities (cat bond SPIs, sidecars, transformers, funds and asset managers, rated insurance carriers, captives, etc), each of which has different demands, requirements, and ‘levers’ for what makes them tick. One great attraction of Bermuda for ILS start-ups is its range of competitive strengths which strike a balance between the very different needs of this disparate group of businesses,” he says.
“These competitive strengths include its regulatory environment (generally harmonised with UK and European legislation), a statutory environment that has been created specifically for the ILS sector, and a depth of support services dedicated to supporting this sector in Bermuda. Such support services include administrative services, ‘incubator’ services, legal, accounting, and other financial services all available on-Island, which ultimately facilitate ILS sector start-ups of all sorts.
“That mix of specialist skills and infrastructure is still unique in the world, particularly as applied across the ILS spectrum.”
Rhoads however is not naïve to Bermuda’s need to evolve and improve if it is to retain its leading position.
“There are areas in which Bermuda’s offering to the ILS sector should be improved in order to maintain its current lead over other domiciles: the cost of some services, the perception of its being a ‘tax haven’ (in certain countries) which does not assist the Island’s offering in this particular sector, and so on,” he says.
“Bermuda cannot be complacent that its lead position is insurmountable, but in general, across the various forms of ILS entities, Bermuda’s product currently strikes the best overall balance on the menu of competing jurisdictions around the world, and we do not see this situation changing in the near term.”
As one of the oldest re/insurance domiciles, Bermuda has decades of experience and a solid reputation for innovating behind it.
It is this innovation that has kept the Island up to date with industry trends, such as the growing interest from smaller sponsors.
In 2013, Kane SAC launched a private catastrophe bond platform, which has so far seen seven transactions totalling more than $135 million.
The platform allows the issuance of smaller ILS transactions, as low as $7 million, and has helped to bring a new wave of issuers and perils into the market, something which, Geils says, will continue.
“As long as the cost structure remains, it will continue. Cost is definitely the main barrier of entry for smaller entities. We would also hope to continue to see diversification through new perils, which is something that investors are seeking,” he says.
For the BSX, its focus is now on a much wider percentage of the industry.
“BSX has a focus now on supporting the insurance industry as well as the alternative insurance industry so it’s a pretty exciting time,” says Wojciechowski.
As the industry nears the end of a very successful year, Bermuda can sleep well knowing that it is still perceived as the domicile of choice for ILS.