15 April 2014ILS

Global leadership in ILS

Bermuda has established a position for itself as the leading global domicile for ILS. Here we receive insights from the diverse set of partners who have been behind its success.

Bermuda has been at the forefront of risk innovation for more than 70 years. Since the 1940s the Island has hosted and nurtured an increasingly diverse range of insurance entities that have gone on to become essential components of globally operating businesses. The Island’s success is based not on the fictional triangle to its south, but on the triangle to the north—between Bermuda, London and New York—which lies at the heart of the multinational trading of risk instruments that encapsulates risks as diverse as earthquakes in California to cyclones in Australia.

The Island is undoubtedly one of the world’s leading risk markets and—rather like golf courses—boasts more actuaries per square mile than almost any other place on earth. And it is this depth of talent that has enabled Bermuda to become a recognised centre of global innovation. The Island has been a reliable home for the industry’s many iterations over the years and investors always look to Bermuda’s lead for the next market innovation.

Insurance-linked securities (ILS) may be a familiar term to those in the industry, but for professionals in the capital markets it represents a captivating alternative asset class that promises to deliver diversification, attractive yields and represents a non-correlated asset class. This makes for an engaged group of investors and a rapidly expanding market.

Thanks to this rising appetite, Bermuda has emerged as the leading centre for the convergence of insurance and capital markets, with a surge in ILS volume and continued interest in third party capital-backed reinsurer formations. Fifty-one new special purpose insurers (SPIs) were registered in Bermuda in 2013, almost twice the 27 registered in 2012, with some estimates suggesting that the convergence market will grow to $100 billion over the next five years.

Several entities on the Island have cooperated to drive this growth—the government through the Bermuda Business Development Agency (BDA), the Bermuda Monetary Authority (BMA), the Bermuda Stock Exchange (BSX), and industry professionals.

The BMA, recognising that speed to market is essential, has over the years developed a thorough, but pragmatic, licensing process. Collaboration among industry participants led to the designation in 2009 of the SPI within the BMA’s insurance supervisory structure, with SPIs representing an efficient means to issue ILS such as catastrophe bonds.

The BSX has also taken a lead role in offering ILS issuers the option of listing securities on the exchange. Greg Wojciechowski, president and CEO of the BSX commented: “In 2013 the BSX ended the year with a record number of ILS issued, helping Bermuda firmly establish itself as a centre of excellence for the creation, listing and servicing of the ILS asset class.”

With a highly regarded regulatory framework, sophisticated legal system, developed infrastructure and global companies, Bermuda maintains a reputation as a quality jurisdiction and has shown the ability to respond to changes in global market conditions and deliver speed to market.

Despite competitive pricing conditions and continued low investment returns, Bermuda reinsurers achieved attractive earnings results in 2013, helped by a benign catastrophe year. At the same time cat funds proved attractive to investors, with some offering record returns. It is clear why capital continues to enter the Bermuda market.

A united front

The jurisdiction has attracted the best and the brightest minds in the industry and hosts some of the largest ILS investors, with constituents continuing to promote the Island through a variety of means. A Bermuda delegation recently attended the Securities Industry & Financial Markets Association’s (SIFMA) annual Insurance and Risk Linked Securities conference in New York, and other delegations continue to promote the advantages of placing ILS business in Bermuda at other events.

Bermuda is a convenient and user-friendly jurisdiction in which to set up funds and continues to attract new ILS funds. A number of fund structures targeting the ILS market operate in Bermuda and administrators and other service providers are tailoring their services to support growing interest in ILS. BMA year-end statistics show that Bermuda represented 14 percent of the global investor base for ILS in 2013. Within this figure 43 percent comprised catastrophe funds, 41 percent institutional investors, 12 percent mutual fund investors, 2 percent hedge fund investors and 2 percent reinsurers.

The BMA has been proactive in ensuring that the regulatory framework governing this sector is appropriate, sensible and robust. As a globally recognised regulator, the BMA understands the importance of a robust framework for ILS and has taken steps to increase efficiency, reduce incorporation time and drive down cost.

The BMA’s response and solutions to growing demand include but are not limited to: the proposed financial stability framework for Bermuda, the opt-in regime for Bermuda’s fund sector, a review of the Investment Funds Act 2006 and Investment Business Act 2003, and their participation in the National Association of Insurance Commissioners’ qualified jurisdiction process, which will help reduce Bermuda’s reinsurance collateral requirements. The regulator’s goal is to ensure Bermuda’s regulatory framework remains appropriate and effective for the market.

Commenting on 2013 registrations, Shelby Weldon, director, licensing and authorisations at the BMA said, “Achieving this level of business in today’s competitive environment reinforces Bermuda’s unique ability to service the full spectrum of high-end, global re/insurance business.

“It also demonstrates the continued relevance of Bermuda as an innovative jurisdiction as the market seeks diversification in risk transfer, with alternative products increasingly complementing traditional reinsurance.”

A useful exchange

Bermuda’s offering has been further strengthened by developments at the BSX. The BSX boasts fully electronic and sophisticated trading platforms and effective regulation yet still has the ability to be nimble and flexible in its approach. A member of the World Federation of Exchanges, it provides an important level of confidence to investors. Despite being a small exchange, the BSX prides itself on providing all the services and functions that its peers in New York or London do.

As Wojciechowski explained, “The BSX’s ILS growth is a significant achievement accomplished through the hard work and commitment of many in and outside of Bermuda who have worked to ensure the Bermuda platform meets and exceeds the expectations of both market and client.

“By leveraging the exchange’s longevity in the global capital markets and its robust technical and operational platform, we hope to be in a position to provide additional stock exchange services to the growing alternative risk transfer and ILS market as capital allocation to the sector continues and it develops additional technological needs.”

The Bermuda government continues to support business growth through the Ministry of Economic Development and the Bermuda BDA. Deputy chairman and interim CEO of the BDA David Cash commented, “We are paying close attention to the needs of the ILS industry in order to ensure that an environment is created that will facilitate the growth of SPIs and ILS volume.

“The future of ILS is promising and Bermuda is a natural home
for this unique risk and investment solution. Bermuda possesses the ideal mix of talent, sophisticated infrastructure and respected regulation to allow ILS to thrive.”

Convergence 2014: cementing Bermuda’s reputation

In 2012 ILS Bermuda was formed. Comprising industry professionals, the group is dedicated to promoting convergence business in Bermuda and last year hosted Convergence 2013, the inaugural such event in Bermuda.

Convergence 2013 was an informative conference and networking event for industry professionals including investors, investment managers, reinsurers, brokers, lawyers, accountants and ILS specialists. Despite a fierce gale blowing, which threatened to derail proceedings—and was a rather dramatic reminder of some of the underlying risks of ILS—Convergence 2013 was a tremendous success and drew close to 300 delegates from around the world.

Tim Richison, chief financial officer at the California Earthquake Authority was among those who attended the event. “We found Convergence 2013 to be a very worthwhile event and are looking forward to attending again this year,” said Richison. “It was educational as well as productive and should be considered one of the leading ILS events globally.”

Convergence 2013 helped Bermuda to demonstrate that it is home to highly-regarded intellectual capital, reinsurance innovation and expertise and is also able to draw wide international interest. Delegates had the opportunity to become familiar with the Island, its infrastructure, the unparalleled access to its reinsurance market, and its highly respected service providers, which helped provide some indication of the ease of doing business in a friendly and comfortable business environment. Bermuda is, after all, home to 15 of the 35 largest global reinsurers and many participated in and sponsored Convergence 2013.

ILS Bermuda intends to build on the success of Convergence 2013 by encouraging further networking opportunities within the ILS space where deal-makers can meet and discuss trends, upcoming renewals, market conditions and create or solidify relationships. The group also hopes to spur discussion and innovation that will lead to the opening up of other underlying risks, lines of business and geographies.

Andre Perez, CEO of Horseshoe Group and member of ILS Bermuda committee said, “I can see us talking at our 10th ILS Bermuda Convergence event about how ILS and collateralised structures are now present in all lines of insurance and reinsurance business.”

Looking ahead, Convergence 2014 in November will continue the theme of innovation and host another world-class event at the Pier 6 waterfront complex in Hamilton. As Brad Adderley, partner at Appleby and committee member of the ILS Bermuda explained, “Bermuda is a world-class reinsurance domicile. The inaugural event cemented Bermuda’s position as the premier domicile for ILS, and Convergence 2014 will build on that success and be even bigger and better, offering more solutions and innovation.”