Why Bermuda should fear the rise of emerging ILS hubs
Bermuda has been the number one domicile for the insurance-linked securities (ILS) for many years now. Its market position is nothing short of dominant. According to the Bermuda Monetary Authority’s Alternative Capital Report 2018, its share of $51.9 billion global total alternatival capacity is approximately 58 percent, and Bermuda’s alternative capital vehicles reinsure cedants from 17 regions.
However, as the ILS markets have grown in size and sophistication in recent years, many other domiciles are eyeing this market and its potential. The likes of the Cayman Islands, Ireland and Guernsey would all love to secure a bigger slice of the pie.
A number of emerging domiciles have been gaining traction too. The UK has started to see deals since it passed regulations to facilitate ILS, while Singapore, Hong Kong, and France are all aiming to become real contenders to become hubs for this sector in the future. Just how much of a threat could these be to Bermuda?
“Bermuda will face stiff competition from other domiciles active in the space or targeting ILS, but the jurisdiction has had a sustainable and effective head-start with its existing regulatory framework, business infrastructure, experience and a track record that speaks for itself,” says Kathleen Faries, head of Bermuda at Tokio Millennium Re, and chair of ILS Bermuda.
Following news that Singapore had issued its first cat bond under its new regulatory regime, Bermuda:Re+ILS conducted a survey into whether Bermuda should worry about competition from emerging hubs. An overwhelming 87.2 percent of respondents answered yes.
“Let’s face it, convergence of the capital markets, like insurance itself, is a very competitive industry,” one reader said.
“Since these are all financial instruments, buyers will go wherever the action is. Now that these are available worldwide, a buyer needs to consider all options.Of course caution needs to be the byword, but yes, the time for action should be now.”
Another respondent commented that Singapore has the benefit of being “closer to the faster-growing Asian markets” and that it may be cheaper. However, they added, Bermuda has “better-recognised expertise”, and a “nice head-start”, suggesting that a lot of Japanese cat risk is already being written on Bermuda. The BMA Alternative Capital Report supports this, attributing 4 percent of gross written premiums (GWP) from Bermuda’s alternative capital vehicles to Japan.
Faries, chair of industry advocate group ILS Bermuda, welcomes the expansion of ILS across the globe, which she hopes will “accelerate the industry’s evolution to a more efficient and robust matching of risk to capital”.
She continues: “With the ‘protection gap’—uninsured or under-insured global risks—we believe the overall pie will grow as emerging markets develop. Access to capital markets interested in the ILS asset class will continue to help drive sustainability and resilience of governments, municipalities, property owners, and corporations across the globe.
“The convergence of insurance risk and the capital markets provides an important opportunity for risk transfer innovation and we are confident Bermuda will remain a significant part of the evolution of ILS.”
While she welcomes the emergence of new domiciles, Faries suggests that Bermuda proved its mettle following the windstorms, floods and wildfires of 2017 and 2018, where she says the ILS market responded efficiently and responsibly.
Here are some of the newer ILS domiciles that have emerged in recent years:
While the Monetary Authority of Singapore (MAS) introduced an ILS grant last year, it wasn’t until recently the jurisdiction issued its first cat bond.
Insurance Australia Group (IAG) sponsored the cat bond, Orchard ILS Pte, as part of its 2019 catastrophe aggregate reinsurance cover.
MAS introduced its ILS grant scheme in February 2018 to help Singapore establish itself as a global hub for Asian risk transfer. The grants fund 100 percent of the upfront costs incurred in issuing cat bonds out of the city-state.
“Given the exposure of Asia-Pacific to natural catastrophes—it was one of the hardest-hit regions by nat cats in 2018, with economic losses of over $89 billion—we expect this will be just the start. Further cat bonds will be issued out of Singapore and, in time, other ILS covering a wide range of risks,” says Ian Stewart, partner at Clyde & Co.
In recent years, Hong Kong has taken steps to promote the development of insurance, reinsurance and captive insurance in the jurisdiction.
Hong Kong financial secretary Paul Chan Mo-po said in February 2019 the government will propose legislative amendments to allow for the formation of special purpose vehicle companies specifically for issuing ILS.
“We will continue to look into measures that are conducive to the development of the industry,” said Mo-po.
In 2018, Hong Kong amended its legislation to extend the 50 percent tax concession for captive insurance companies’ businesses to cover both offshore and onshore risks, with a view to draw more enterprises to set up captives in Hong Kong.
Being the world’s oldest and one of the most established re/insurance centres, London has become more involved in the ILS space. One of the key benefits of London is its proximity to Lloyd’s, and all the re/insurance underwriting, broking and actuarial talent that goes with it.
The UK’s ILS regulations came into force in December 2017, and allow the set-up of insurance special purpose vehicle and protected cell companies with exemption from corporation tax on insurance risk transformation profits and a complete withholding tax exemption for non-UK investors.
To date, the London ILS market has already completed its fair share of deals. Neon Underwriting launched its first ILS vehicle in the UK at the beginning of 2018: NCM Re completed the first UK ILS transaction, a $72 million collateralised quota share reinsurance transaction with Neon’s Syndicate 2468.
Further into 2018, SCOR became the first reinsurer to use the new UK ILS regime to issue a cat bond.
Having not openly expressed its desire to become an ILS hub, France is a bit of an unusual entry to this list, but it introduced its first ILS vehicle governed by French law at the end of March.
CCR Re set up the first France-domiciled reinsurance sidecar, 157 Re, and said it is committed to promoting Paris’s financial marketplace and the development of ILS there.
157 Re assumed a 25 percent quota share of CCR Re’s worldwide property cat portfolio, providing the reinsurer with fully collateralised capacity.
Unlike the UK, France has not enacted any ILS-specific regulations, and instead the ILS instrument takes the form of a mutual securitisation fund (fonds commun de titrisation), which has been in use for some time.
“By creating and sponsoring 157 Re, the first French ILS instrument, CCR Re’s teams have confirmed their innovative skills and mindset, as well as their commitment to promote the Paris financial marketplace attractiveness and development,” says Bertrand Labilloy, chairman & CEO of CCR Re.