The Bermuda Stock Exchange (BSX) expects to surpass $3 billion in listed insurance-linked securities (ILS) by the end of this year, according to BSX CEO Greg Wojciechowski.Earlier this month, the Exchange surged past the $2.9 billion mark when the listing of three catastrophe bonds through Compass Re, with a combined value of $575 million, was approved.“We’re very positive at the Exchange about ILS,” Mr Wojciechowski told The Royal Gazette. “We now have 23 ILS listed, worth just under $3 billion. There are more deals in the pipeline and we anticipate that we will go past $3 billion by the end of this year.“That’s all happened in the space of about two years.”The securities pay attractive yields to investors who risk losing their principal in the event of a specific event meeting certain conditions, particularly in terms of size of insured losses. One of their selling points is that, as an asset class they are non-correlated with the financial markets.Another is that ILS provides a means for the capital markets to invest in the reinsurance industry without tying up their money in reinsurance companies, many of whose share prices have been trading at a significant discount to book value.The capital invested provides extra capacity for sponsoring insurance and reinsurance companies, allowing them to write more business and cover larger risk exposures.Since the late 1990s, the Cayman Islands has been the offshore domicile of choice in the ILS market. Over the past two years, Bermuda has been winning an increasing share of new business, however.This has largely been down to a change the addition of a “special purpose insurer” (SPI) classification to the Bermuda Monetary Authority’s insurance regulation regime. This created an efficient framework for creating ILS vehicles.Investors and sponsors can get their ILS in place rapidly. “Provided all documents are presented correctly to the BMA, the SPI approval process can be completed within a week”, states a BSX document on convergence between the capital markets and the insurance industry.SPIs do not have the same reporting and audit obligations as under the BMA’s previous classification system. The logic behind this is that the SPI is fully funded to cover all its potential obligations and is therefore perpetually solvent.Shelby Weldon, director, Insurance, Licensing and Authorisation at the BMA said there had been a marked acceleration in SPI formations this year.“We have already seen 19 new SPIs registered this year,” Mr Weldon said. “This compares to eight SPI registrations for the whole of 2010. The SPI framework the Authority put in place in 2009 provides the appropriate regulatory oversight for such vehicles, while supporting another option for the market to utilise Bermuda’s alternative risk transfer expertise.“The Authority is pleased to note market interest in these vehicles translating to more registrations.”Several of those SPIs have issued catastrophe bonds.“We are also pleased with the number of catastrophe bonds being formed in Bermuda this year, with eight already being registered in 2011,” Mr Weldon said. “Last month, we were particularly pleased to see the approval of a $575 million cat bond issue via Compass Re, a Bermuda SPI.”Compass Re provided protection to Chartis, the property and casualty insurance unit of American International Group. In January this year, Chartis also listed a $450 million catastrophe bond through Lodestone Re on the Bermuda Stock Exchange (BSX).Another major company to participate in the Bermuda ILS market is Munich Re. The massive German reinsurer gained extra capacity through Queen Street IV Re’s issuance of a $100 million BSX-listed catastrophe bond in November. The company has also used the Cayman Islands to issue cat bonds in the past.Earlier this month, Beat Hollinger, the head of Munich Re Capital Markets, was in Bermuda to speak at the Ernst & Young P&C Insurance Outlook 2011 conference in Hamilton.Afterwards, Mr Hollinger said: “We’ve had a very good experience in Bermuda. We advise our clients to use Bermuda for special purpose vehicles, rather than other islands that offer similar capabilities. It has good regulation and an established stock exchange.”He did not want to discuss why Munich Re had switched its ILS jurisdiction of choice from Cayman to Bermuda.He sees great growth potential in the ILS market. ”We see some real momentum,” he said. “The capital markets are so much bigger than the insurance markets, convergence makes sense.”Some cat bonds have been triggered this year by events including the Japan earthquake and tsunami in March and the damaging tornadoes in the US this year. Mr Hollinger did not believe this would not put off potential investors. Sophisticated investors would expect to take losses on cat bonds when massive disasters occurred. In the long run, they would expect to earn back that capital and more in the form of strong returns.According to Mr Wojciechowski, ILS represent a logical evolution of Bermuda’s insurance industry.“Bermuda is known for its experience and expertise in the insurance industry and we at the Exchange should be looking to support it from a capital markets perspective any way we can,” Mr Wojciechowski said.Although the job creation potential of ILS would appear to be less than of the formation of traditional reinsurance companies, the market certainly helps to support existing international business jobs, in law firms and asset managers as well as reinsurers. Business activity in this space is certainly on the increase.Nephila Capital is a major manager of insurance-linked investments and has manages some $5 billion. Insurance management company Horseshoe Group and ISIS Fund Services teamed up earlier this month to create a new fund administrator called ILS Fund Services. Don Kramer, who has started several Bermuda reinsurance companies, this year started up a new fund management company called ILS Capital Management.When Ernst & Young partner Jonathan Reiss said earlier this month that he’d taken more calls in the last five months on potential new insurance business activity than in the previous two years, he said most of the interest related to the ILS market.