London lays out plans to enter ILS industry
Britain has revealed details of its plans to seize a slice of the global catastrophe bond business that Bermuda dominates.
A new regulatory framework and exemptions from corporation tax for the sector are among the proposals put forward by the UK Treasury and the Bank of England.
The new rules have been urged for some time by the London Market Group, which represents the British capital's insurance industry.
The insurance-linked securities market, which includes catastrophe bonds and collateralised insurance products, has boomed in recent years and Bermuda has emerged the world leader as a domicile for this niche.
Initial reaction from the Bermuda market yesterday was that the island's ILS market can continue to thrive, even if London is successful in attracting a share of the business.
And with Britain's exit from the European Union looming in the coming years, Bermuda, with its track record, framework for and expertise in ILS, is seen as offering greater stability for investors.
ILS issued from Bermuda represented 70 per cent of total outstanding global capacity as the end of the second quarter, or $17.6 billion of the world's total $25.1 billion, according to the Bermuda Monetary Authority's ILS Market Report, published last month.
Nearly 160 ILS structures with a value of some $19 billion have listed on the Bermuda Stock Exchange.
Andre Perez, chief executive officer of Horseshoe Group, a Bermudian company that has thrived on the ILS industry, said Britain's move had been in the works for the past two years.
“Bermuda has been at it for a while on the ILS front, so I don't think this new London initiative will be a big threat for Bermuda,” Mr Perez said. “There is room for several ILS domiciles around the world.
“If anything, the fact that the London market is hopping on the ILS bandwagon is pretty exciting as it does, in a way, further validate this growing sector of the market.
“I personally do believe that London will be successful in attracting new ILS opportunities and further grow the market. This is about making the ILS pie bigger.”
Inga Beale, the chief executive officer of the London-based Lloyd's insurance market, caused a stir on the island last month when she said at a conference in Germany: “For whatever reason it happened, I feel that Bermuda stole the ILS market from London.”
Mr Perez said that in reality the two insurance centres had a symbiotic relationship.
“I would hate to pin one domicile against another,” Mr Perez said. “Despite Inga Beale's comment a few weeks ago coming across as flippant and ill-informed, the reality is that both jurisdictions have been working hand in hand for many years, supporting each other's growth.
“They both have different attributes which may attract different type of ILS transactions. Several ILS participants are either in Bermuda or in North America, this will probably give the edge to Bermuda.
“However, transactions with European nexus may be a better fit in London.
“Bermuda has done a fantastic job at keeping in touch with the market realities, and as long as it continues to do that and steer clear from becoming inflexible or dogmatic, then there is no reason why it would not continue to thrive as one of the foremost reinsurance and ILS domiciles in the world.”
The ILS industry provides an efficient source of third-party capital for the reinsurance industry and also provides work for law firms and fund managers. Many Bermuda reinsurers have set up their own alternative capital arms.
A report commissioned by the Bermuda Business Development Agency, published in July this year, found that the ILS industry created 400 jobs in Bermuda in 2015 and had a total economic impact on the island's economy of more than $730 million.
Gavin Woods, counsel with law firm Appleby, said: “In our experience, interest in ILS is driven by the needs of sponsors and investors and Bermuda has established a legal and regulatory framework that corresponds with such requirements.
“However, the ILS market is constantly evolving to meet the challenges of sponsors and investors and time will tell whether London will contribute to the healthy growth of the ILS market.”
He added that Bermuda had become the pre-eminent ILS jurisdiction and so it was only natural that others would look to replicate its success.
“London's interest in the ILS market validates Bermuda's decision to promote ILS as it continues to attract sponsors and investors as the premier ILS jurisdiction,” Mr Woods said.
Asked whether Bermuda would be able to compete effectively with London for ILS business, Mr Woods said: “Bermuda has established an excellent reputation within the ILS market, based on a legal and regulatory framework that satisfies the needs of sponsors and investors, and a financial services industry that is dedicated to the success of ILS.
“As a result, one should query what advantages does London have that may enable it to compete effectively with Bermuda's dedicated ILS regime.”
Greg Wojciechowski, chairman of ILS Bermuda and CEO of the BSX, said competition was always inevitable in an area in which Bermuda had enjoyed so much success.
“Bermuda has earned the right to be referred to as the world's risk capital and a centre for excellence for the creation, support and listing of US structures,” he said.
“This position is the direct result of our resilience, innovativeness and ability to anticipate and respond to changes in our core markets as they occur and with our clients that we service in mind.
“Bermuda was one of the first jurisdictions that embraced the creation, support and listing of ILS structures and is now the leading centre of excellence for this business with the greatest global market share of ILS.”
Bermuda had been servicing this market niche for nearly a decade and its infrastructure and expertise gave comfort to clients, he added.
The island had proved it could consistently deliver speed to market — important, given that many ILS opportunities were time-sensitive.
Analysts from Peel Hunt believe London's late arrival on the ILS scene could result in a continued weakening of reinsurance rates as it encourages more alternative capital to pour into the reinsurance industry.
The Artemis.bm website, which specialises in news from the alternative risk transfer market, quoted Peel Hunt analysts as saying: “Alternative capital accounts for about 20 per cent of reinsurance risk exposures in H1 2016 and the increase in alternative capital has been one of the main reasons behind the softening of reinsurance rates.
“Hence, it is likely that reinsurance rates, in particular, will remain soft should a liberalisation of ILS in the UK attract more capital.”
The UK Government will put the proposed ILS regulations before Parliament next spring.