ILS market thrives amid growing competition
Bermuda’s insurance-linked securities sector is continuing to boom after a year in which it was tested by significant hurricane losses.
The Bermuda Stock Exchange ended April with total ILS market capitalisation of $28 billion, a record high for the exchange.
In the opening four months of this year, new ILS with a value of $4.8 billion have listed on the BSX, according to Greg Wojciechowski, the exchange’s chief executive officer.
In a report last month, risk adviser Willis Re observed a “rapid reload of ILS funds” as investor appetite was undeterred by last year’s losses after hurricanes Harvey, Irma and Maria triggered payouts by some catastrophe bonds.
Andre Perez, chief executive officer of Horseshoe Group, one of the leading players in the ILS market, said: “Overall, the ILS market responded as expected. With obligations being fully collateralised, cedants had full access to collateral and everything ran pretty smoothly from a claims payment perspective with no known claims dispute.
“While we thought initially that the trapped collateral would cause an issue with January 1 renewals, the majority of ILS funds raised a significant amount of additional capital and were able to post fresh collateral for renewals.”
Horseshoe operates at the convergence of the reinsurance and capital markets offering services to ILS sponsors and investors alike, giving it a broad view of the market. It has expanded from its Bermuda roots and also has offices in Cayman, the US, Gibraltar and Ireland.
Mr Perez sees reasons on all sides of the market for growth to continue. “We are still seeing significant interest by investors, mostly pension funds, to invest in the ILS market,” he said.
“Investors are still seeing this asset class as diversifying the rest of their investment portfolio with low correlation to the general financial market.
“Furthermore, ILS, and more specifically collateralised reinsurance, is seeing increased acceptance by ceding insurers and reinsurers around the world.
“In addition, we are starting to see a broader type of risks being covered by ILS, which fuels the continued growth, as well as ILS funds investing more on the insurance side rather than reinsurance or retrocession.”
Bermuda is the dominant domicile in the ILS business, but competition is growing as the industry expands. Mr Wojciechowski said the growth story was a testament to the island’s attributes.
“One of the prominent themes is using Bermuda’s ability to innovate to meet the changing needs of the market it serves,” he said.
“Others, such as Cayman, the Channel Islands, Gibraltar and Malta have tried to follow suit, but Bermuda’s advantage is that we have a complete insurance industry ecosystem.”
Bermuda’s long-established expertise in the property-catastrophe expertise made it a natural home for ILS, Mr Wojciechowski said. But as well as insurers, the island also has the legal and regulatory framework, the securities exchange, experienced lawyers, accountants and brokers, and also specialist ILS fund managers who could attract money from the capital markets and invest it.
Bermuda’s ILS boom began in 2010 after the island introduced special purpose insurer rules, creating a regulatory framework for ILS vehicles.
“It’s been interesting to have watched this happen,” said Mr Wojciechowski. “London and Singapore are entering the ILS business and for us to be looking at such large markets as our competition is significant in itself.”
The UK has launched its own regulatory and tax framework for ILS, but some sponsors are reportedly being deterred by uncertainties connected with Britain’s impending departure from the European Union.
Artemis, the website that closely follows the ILS market, reported that at an industry event in London last week, Rob Cannon, special counsel at law firm Cadwalader, Wickersham & Taft, said he had seen “slight reluctance because of Brexit”.
“I think at the moment for sponsors, a number of sponsors on the continent, the slight reluctance to use the UK regime is whether or not, post-Brexit, the decisions that the PRA [Prudential Regulatory Authority] would make are effectively black-boxed vis-à-vis their own national regulators,” Mr Cannon added.
Mr Perez doubted whether the future of Britain’s regulatory regime, relative to that of the EU, would have any impact on the UK’s prospects for attracting ILS business.
“We have read reports about how post-Brexit, the UK may not retain or pursue its Solvency II status, and how this could threaten its future as an ILS domicile — this is utter nonsense,” Mr Perez said.
“One should be reminded that special purpose insurers in Bermuda are outside the Solvency II equivalency and it hasn’t affected the issuance of ILS structures in Bermuda.
“Furthermore, the Cayman Islands are not a Solvency II-equivalent domicile and again it hasn’t affected their ILS issuance.
“While there are certain key requirements that ILS structures need to include in order to be acceptable to Solvency II domiciles, to our knowledge, all of the ILS structures done so far do comply with those requirements, regardless of the domicile.
“We do not believe at this stage that Brexit will affect materially the ILS market potential in the UK.”
The new British framework received a vote of confidence this week from French insurer Scor, which switched its ILS domicile from Ireland to the UK. Scor’s $300 million issuance under the name of Atlas Capital UK 2018 PLC was billed as the first UK catastrophe bond.
Competition is inevitable with further global growth of ILS and not something that Bermuda should fear, Mr Perez said.
“Bermuda still has the lion’s share of the ILS market and this will probably continue for a number of years,” he said.
“Having said that, aside from Cayman Islands, which has been an ILS domicile for a number of years, new ILS domiciles like the UK present additional opportunities for new ILS structures to be done elsewhere.
“The aim is to make the ‘ILS pie’ larger by giving more choices rather than jurisdictions cannibalising one another.
“As always, there is a delicate balance to be struck between the credibility of a particular domicile and the amount of regulatory burden imposed in that domicile.”