Can the UK compete with top ILS jurisdictions?

The UK government’s plans to develop an insurance-linked securities (ILS) regime have been welcomed across the industry. But the question is: could the UK really ever compete with top ILS jurisdictions?

Intelligent Insurer spoke to a number of executives on what the UK will bring to the table, the impact of the new regime on the industry and whether any obstacles could stand in the way.

“The UK, and London in particular, is a natural domicile for ILS transactions. Lloyd's and the London market provide a centre of excellence and deep understanding of these structures. The insurers, reinsurers, and global brokers who securitise catastrophe risk for transfer into the capital markets all have a strong presence in London,” said Stefan Holzberger, managing director, analytics - EMEA at rating agency AM Best.

Given the lack of details, regulation could pose a potential obstacle. Questions over what type of regulatory framework might be introduced and how it might avoid conflict with Solvency II requirements have been raised by Fitch Ratings.

Fitch also raised the possibility that tax rules may not be as attractive as those in Bermuda, Cayman or Guernsey.

Simon Kilgour, partner at law firm CMS, added: “It remains to be seen whether the UK Treasury will succeed in adapting the tax regime sufficiently to compete with other capital-friendly jurisdictions such as Bermuda.

“If so, we would anticipate many London market carriers developing an ILS capacity as part of their menu of options, alongside traditional re/insurance companies and Lloyd’s syndicates.”

Fitch believes that the impact on reinsurers will vary depending on where their existing business is focused.

“Companies underwriting lines of business that compete more directly with ILS products could find it harder to grow or maintain their market share, even if the reforms were successful in attracting additional reinsurance business to London,” said the rating agency.

Others are optimistic on the validation the UK could bring to the ILS industry.

Holzberger explained that although the choice of domiciles may not be a significant factor for most transactions, the strong insurance regulatory framework in the UK could promote a greater standardisation of ILS structures.

“This in turn could provide more comfort to would-be issuers and investors and act as a catalyst for increasing the size and scope of the ILS market,” he said.

Kiran Soar, Ince & Co’s head of reinsurance in London, said: “London’s credibility as a world leading reinsurance hub will also help dampen perceived fears that the ILS market is a ‘short term’ industry that has not been tried and tested.

“There have been few real ILS claims, but where there have been claims (in the US), a significant proportion have ended up in dispute. A move towards London can help change those negative perceptions.”

Kilgour warned that traditionally, ILS capacity has tended to focus on low-frequency, high-severity exposures such as natural catastrophes, and may continue to be susceptible to the same disputes on whether triggers have been breached as industry loss warranty reinsurances.

“As the areas of risk covered by ILSs broaden, aggregation disputes – whether losses are sufficiently related that they should be stacked together - may also arise,” he said.