Expect to see 'flight to simplicity' in ILS market
Ross Webber, the managing director of Apex Bermuda, and the former chief executive officer of the Bermuda Business Development Agency, has shared his thoughts on the insurance linked securities market and how he expects it to evolve.
Q:How did Bermuda’s ILS market respond to the global pandemic?
I was pleased, but not surprised that Bermuda maintained a fully functioning re/insurance system comprising underwriters, claims professionals, service providers, brokers and reinsurers to name but a few. During 2020 the Bermuda ILS sector has largely done well by its investors and their reinsurance clients by providing well-priced, and well-serviced, capacity.
The Bermuda Monetary Authority’s timely issuance of electronic licenses was especially helpful in allowing the industry to enact business continuity plans. In my opinion, ILS service providers have predominantly been advanced in their business continuity and contingency planning. We saw very few cases where managers (and by extension their administrators) were not able to carry out all aspects of their business remotely. Evidence of this was provided by the robust volume of business successfully transacted through the major renewal dates.
How do you expect private equity interest in ILS to evolve in 2021?
Of course, ILS funds saw differing outcomes in the 2021 launches; there were some who were unable to raise additional capacity with some experiencing net declines in AuM due to redemptions and further loss emergence from previous events. For others, trapped capital continues to hamper activity in the sector. However, we have also seen several managers secure significant new funding and meet the increasing capacity demands of the market.
Continuing private equity interest in the asset class should provide a fertile environment for new entrants who may bring a new approach to managing and deploying capital. The January renewal season saw firmer reinsurance rates, positioning the ILS market as an attractive investment for the year ahead.
Many predict that 2021 will be characterised by a ‘flight to quality’ in Bermuda. What does this mean for new and existing players?
It’s not just a ‘flight to quality’ but also simplicity. ILS can offer investors the returns, value and diversity they require – but investors will remain discrete and selective. In order to attract fresh capital to the market, funds will need to offer a differentiated capital markets value proposition.
I expect a narrowing of focus in the ILS market – ‘the flight to simplicity’ – with an increase in writing monoline business rather than broad structures. As such products will be streamlined to become more specific to class, peril and geography than we have seen previously.
However, setting up new companies during the ongoing global pandemic raises a number of practical considerations of incorporating and structuring a fund and appointing the right service provider will be critical. For many, this will be cumbersome and we expect companies on the island will innovate by leveraging existing management, underwriting teams and capital bases, with sidecars providing an attractive option.
How will the ESG [environmental, social and corporate governance] trend play out with regards to ILS?
This is the three letter acronym I hear almost as often as ILS. ESG has been treated as something of a buzzword or fad across the asset management universe, but 2020 showed us that it is here to stay. We are seeing rocketing interest and demand from ILS investors in ESG who are increasingly asking how funds can be tailored or designed to be ESG compliant. Continued demand for high ESG investment standards will not only accelerate ILS market growth, but could play an integral role in the long-term sustainability and attractive returns for capital markets investors going forward. For me, the ILS asset class is extremely well aligned with ESG principles.
In 2021, steps need to be taken to provide even greater visibility of ESG characteristics of ILS investment portfolios. The introduction of guidelines surrounding ESG branded ILS portfolios is inevitable, and funds are looking to get out ahead of potential regulation and ensure compliance ahead of time. As a jurisdiction, I would like to see that we are striving to ensure that we strike a balance between adhering to international standards and creating best practices without introducing overly prescriptive regulation that might dampen innovation.
What does London‘s renewed focus on ILS innovation mean for Bermuda?
Bermuda’s dominance of the ILS market was not built over night and isn’t likely to change any time soon, certainly not in the space of a year. The Bermuda Stock Exchange currently has over 500 listed issuers and circa $40 billion in market capital outstanding, representing almost 95 per cent of market share of global ILS. Bermuda’s regulatory platform certainly cannot be accused of complacency as it continues to encourage new developments, as seen by the introduction of the ISAC Act for incorporated segregated account company structures last year, as well as the new Collateralised Insurer (CI) allowing for insurers to lead more complex ILS deals such as retroactive legacy covers and structured casualty-ILS. Interestingly, I worked on the first iSAC structure to be used in a funds context which shows the adaptability of legislation and the innovation of the market. The structure remains ideal for ILS purposes.
Perhaps the new London market ILS initiatives will gain greater traction in 2021 – and of course we’d encourage any initiatives which allow capital to enter the market and access risk within it more easily. For the ILS industry, it truly is not a case of one or the other. I maintain my position that Bermuda provides a complementary ILS jurisdiction to Lloyds, with a huge amount of overlap between the two markets. For us, recent UK changes to encourage ILS have only served to increase the size of the pie, rather than eating into Bermuda’s portion.