ILS framework could make London the global hub

London’s new ILS framework can make the City the global hub for innovative ILS solutions, according to Guy Carpenter.

To become the global ILS hub the regulator needs to adopt a proportionate and responsive approach appropriate to the nature, scale and complexity of the risks assumed, said Des Potter, head of GC Securities, EMEA, Guy Carpenter. Potter sits on the London ILS Task Force.

“If we can leverage London’s broking, underwriting and actuarial talent to provide innovative solutions to big challenges such as the protection gap in both mature and emerging markets, London can become the global centre for reinsurance risk transfer,” Potter said.

“The UK’s success has got to be based on innovation. The goal is not to stem the flow of business going to Bermuda or to grow London’s market share of cat bonds, but to take ILS to its next stage of evolution using the unique skillset we have in London,” Potter explained.

The London Market Group’s “London Matters” report highlighted that although reinsurance is the largest class of business underwritten in London, it continues to lose global market share – it fell from 15.0 percent in 2010 to 12.3 percent last year – a key factor being lower cost of capital in ILS business transactions in rival jurisdictions like Bermuda.

“London’s ILS framework will be vital in enhancing the City’s standing in the global reinsurance market. The big challenge is whether the U.K. regulator can provide the speed and certainty required to enable the U.K. to compete effectively with other ILS jurisdictions. The U.K. has a strong global reputation, but as the ILS market evolves, the regulator will need to be far more responsive than it is today,” Potter warned.

“After the next major property catastrophe loss event, reinsurers will almost certainly turn to the ILS market for recapitalisation. Right now, London’s infrastructure is not efficient enough to allow capital to be deployed quickly or cost effectively,” he explained.

He added: “If there were another Katrina tomorrow, it would take the UK many months to approve plans for capital to flow in, in which time Bermuda would have raised billions. London’s market share could drop materially within a few weeks of such an event.”

Legislation for the ILS framework is currently awaiting approval in the UK Parliament and is expected to come into force by late October. The regulations will allow the set-up of insurance special purpose vehicles and protected cell companies with exemption from corporation tax on insurance risk transformation profits and a complete withholding tax exemption for non-UK investors.

“These enhancements are going to put London in a better position,” Potter says, adding that there was “good will” towards the framework from the U.K. Government, financial markets and the next generation of brokers and underwriters.

“I do believe London’s ILS market will gain traction,” Potter noted. “The regulator will face a learning curve initially, but over a five-year horizon I really believe that, with its access to both insurance talent and financial markets capital, London can offer a market-leading alternative for risk transfer to the capital markets.”

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