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UK seeks slice of Island’s cat bond business

BSX CEO Greg Wojciechowski

The UK government has set up a special task force to snatch lucrative catastrophe bond insurance-linked securities business from Bermuda.

The British Government — then a Conservative/Liberal Democrat coalition — signalled in its budget last March that it had set its sights on the alternative reinsurance market in a bid to attract a chunk of the $22 billion cat bond business to the City of London.

Barry Le Page from the secretariat of industry body the London Market Group (LMG) said: “A task force has been set up, we are looking to have something produced by the autumn.”

He added that the working group includes lawyers and fund managers as well as insurers and would look at changes Britain needs to make to compete with offshore centres such as Bermuda.

Bermuda was the domicile of choice for 57 per cent of ILS in 2014 — with $16 billion worth of listings on the Bermuda Stock Exchange (BSX).

BSX president and CEO Greg Wojciechowski said that Britain would struggle to take business away from the Island — but warned Bermuda could not rest on its laurels.

He added: “Bermuda has developed a level of experience through its longevity supporting international business, including insurance and reinsurance and has deep experience and understanding of the market.

“Insurance-linked securities and the creation and support of these vehicles is an evolution of the development of the reinsurance industry.

“From our perspective, it shouldn’t surprise anyone in Bermuda that our experience and the success we have had to date should capture the attention of other jurisdictions.

“We should be flattered that a jurisdiction of the size and importance of London should notice Bermuda.”

But he added: “It should be a very strong wake-up call that we have to continue to listen to what our customers want.”

And he said that the Island should continue to develop the regulatory framework to “keep us at number one in ILS”.

Mr Wojciechowski added: “This is still a very solid area of business for us and we are the largest exchange for listings of issued cat bonds. And it will take time for the UK to develop the infrastructure Bermuda has.”

The catastrophe bond market has seen double-digit annual growth since the financial crisis, as yield-hunting investors seek out government bond-beating returns.

Catastrophe bonds are issued by insurers as a hedge against a catastrophe, often as a cheaper or more flexible alternative to reinsurance.

A record $8 billion worth of new deals were launched in 2014.

But a report last year by the LMG and Boston Consulting showed London’s share of the global reinsurance market is declining while Bermuda has shown a rapid ascent.

The report highlighted alternative reinsurance products such as catastrophe bonds as areas of growth.

Bermuda has built up expertise at structuring the special purpose vehicles needed to convert insurance products into these capital market instruments, as it offers a more attractive regulatory environment.

Britain would need to make similar regulatory changes to compete, industry observers said, while Bermuda also offers tax advantages which the new British Conservative government may find hard to replicate.

“What the government’s appetite may be for this, set against a background of continuing austerity and spending cuts, will have to be seen,” said lawyers at Clyde & Co in a note.

Britain is also competing with Gibraltar, which stole a march by launching its first insurance-linked security last month.

But London already has the world’s biggest speciality insurance market, Lloyd’s of London.

John Seo, managing principal of Connecticut-based Fermat Capital Management, which has a presence in Bermuda, said: “It’s a really good idea for London.”

He added his firm he would open an office in London if it developed as a catastrophe bond centre.

Mr Seo said: “If the nuts and bolts of the market are there, it becomes compelling.”