Mirror, mirror, on the wall, who is the fairest of them all?
In 2012, approximately 40 percent ($2.5 billion) of the global ILS market’s cat bond issuance came from Bermuda’s special purpose insurers (SPIs). During the ﬁ rst half of 2013, there has been approximately $4 billion in total cat bond issuances, of which more than 50 percent ($2.2 billion) were provided by Bermuda-domiciled SPIs. It is anticipated that total ILS issuances in 2013 will likely exceed $7 billion.
Since the implementation of the SPI class in 2009, the Bermuda Monetary Authority (BMA) has issued more SPI licences than any other insurance class (see Figure 1). The growth in this sector has had a positive impact on the Bermuda economy and has created opportunity through the creation of jobs, especially within the service sector.
Bermuda is home to some of the largest dedicated ILS investment managers, including CATCo Investment Management and Nephila Capital. According to Munich Re’s ILS Market Update Q1 2013, the majority of capital invested in ILS products comes from dedicated ILS funds representing 65 percent of the investor base in 2013, up from 40 percent in 2007. This shift is largely due to pension funds and other new investors entering the ILS market for the ﬁ rst time, preferring to use the resources of experienced ILS fund managers.
There are a number of reasons for Bermuda’s success in attracting the ILS market. It is no different from why private equity and hedge fund investors have been choosing the Island for more than 25 years to set up traditional reinsurance operations. The success of any industry relies on strong infrastructure and good partnerships between a jurisdiction’s service providers, regulators and operators. Bermuda has a distinct competitive advantage in intellectual capital already on the ground, which is able to drive growth and innovation in the ILS space. This strategic position has made Bermuda the domicile of choice, which will help further drive Bermuda’s leading position in this evolving market.
The Bermuda Stock Exchange (BSX) has made signiﬁcant contributions to Bermuda’s achievement within the ILS space, as well as in other areas of ﬁnancial services. Greg Wojciechowski, CEO of BSX, has commented: “Bermuda has deﬁned itself through innovation and the growth of insurance securitisation. The jurisdiction continues to attract the best and brightest minds in the reinsurance industry which is demonstrated by the presence on the Island of some of the largest dedicated ILS investment managers.
“There are currently more than 625 securities listed on the BSX, of which 60 are ILS, listed with an aggregate market capitalisation of just over $8 billion,” he added. As at June 30, 2013, AON Benﬁeld estimated the outstanding cat bond market as being $17.5 billion.
Bermuda is an ideal jurisdiction in which to set up a collateralised vehicle and dedicated ILS fund. This is in part due to the Island’s efﬁcient licensing process (insurance applications are ﬁled with the BMA and typically can be started, reviewed and generally approved in approximately ﬁve working days) and to its risk-based regulatory approach. The Island’s reputation for transparency, and speed to market compared to other jurisdictions, are supported by the BMA’s pragmatic and effective regulation of the insurance industry, its cost competitiveness, with the review and reduction in the SPI licence fee to $6,000 to ensure that Bermuda remains the most important global and ILS jurisdiction.
Where’s the competition?
Bermuda’s success in attracting new ILS structures has not gone unnoticed by competing jurisdictions which are also targeting the ILS market.
The Cayman Islands has historically been active in the ILS space; particularly in the catastrophe bond and sidecar markets. Cayman was the ﬁrst offshore jurisdiction to introduce a legal framework (Class C insurer under The Cayman Islands Insurance Law, 2010) designed for fully collateralised insurance structures and as a result played host to the majority of catastrophe bond transactions up to 2009. This changed abruptly when the BMA introduced the SPI class by passing the Insurance Amendment Act 2008. Since then, Bermuda has gained signiﬁcant market share and is now domicile for the majority of new catastrophe bond and other fully collateralised structures. During the ﬁrst six months of 2013, the BMA issued 20 SPI licences of which 10 were catastrophe bond structures—compared to only two new catastrophe bond structures licensed in the Cayman Islands.
"The mission of ILS Bermuda is to build and sustain businesses, promote job creation and lead ecconomic development in Bermuda through the growth of ILS."
In addition to the Cayman Islands, we are starting to see the emergence of other jurisdictions actively targeting the ILS market. Guernsey’s Financial Services Commission announced that it issued licences to 46 new international insurance entities through the ﬁrst half of 2013. However, this ﬁgure is distorted when comparing registration statistics of other jurisdictions since the majority of new licences in Guernsey were issued to cells of protected cell companies (PCCs). Insurance PCCs in Guernsey are regulated at the cellular level; this differs from Bermuda which regulates segregated accounts companies (SACs) at the company level. Accordingly, BMA registration statistics do not include the number of accounts within SAC structures in existence.
Bermuda offers more ﬂexibility in regulation to ILS structures since it allows entities to use the SAC and SPI frameworks. At present Guernsey does not have a similar class of licence to Bermuda’s SPI or Cayman’s Class C but it is promoting the use of PCCs to use as special purpose vehicles to facilitate the translation of capital market transactions into insurance transactions, or as risk transfer conduits to enable securitisation of future income streams.
PCCs are not dissimilar to Bermuda’s SACs which have been around for more than 20 years and allow the company to create ‘segregated accounts’ in order to separate the assets and liabilities attributable to a particular class or series of share of the SAC from the assets and liabilities attributable to every other class or series of the SAC. In Bermuda, many dedicated ILS funds and management companies such as Tokio Solutions Management (Shima Re), Horseshoe Group (Horseshoe Re), and Kane (Kane SAC) are using SACs as an efﬁcient and low-cost platform to transfer insurance risk to the capital markets.
Other domiciles such as Ireland, Singapore and Malta have also signalled to the market that they are interested in attracting ILS investors. The Malta Financial Services Authority is presently in the process of establishing a special purpose reinsurance vehicles legal framework with the intention of full implementation by the end of 2013. It is only a matter of time before other jurisdictions such as Singapore introduce similar legislation. With new investors, cat bond sponsors, and new ILS managers continuously entering the ILS market from Europe, Middle East and Asia, there is a risk that they have a predisposition towards other jurisdictions and will select one on that merit despite Bermuda’s strong reputation in the reinsurance global reinsurance community.
Jason Carne is head of ILS at KPMG Bermuda. He can be contacted at: Jasoncarne@kpmg.bm
Adam Smith is a senior manager at KPMG Bermuda. He can be contacted at: email@example.com
ILS Bermuda and Convergence 2013 In 2012, a group of professionals from across the industry came together to form an organisation called ILS Bermuda. The mission of ILS Bermuda is to build and sustain businesses, promote job creation and lead economic development in Bermuda through the growth of ILS. ILS Bermuda brings together the shared interests of participants in the alternative reinsurance, convergence and ILS marketplace.
On November 13 and 14, 2013, ILS Bermuda will be hosting the Island’s inaugural global ILS Convergence 2013. This is an invitation- only event which will play host to guests from around the world representing insurance and reinsurance companies, sponsors, ILS investors including pension funds, securities ﬁrms and investment banks, asset managers, regulators and service providers. Attendees to Convergence 2013 will have the opportunity to network and discuss the industry’s most strategic opportunities and pressing challenges in an environment focused on building relationships and making deals.
For further information on Convergence 2013, visit: http://www. kpmg.com/bm/en/issuesandinsights/articlespublications/pages/ ilsbermuda2013.aspx