ILS growth underlines Bermuda’s role as the World’s Risk Capital

The insurance-linked securities (ILS) market sits at an interesting point in its existence and now has the opportunity to encourage greater capital market participation by providing sorely needed resources to close the extensive exposure gap that exists in insurance markets globally.

In respect of ILS or alternative risk transfer, we are speaking about the convergence of two industries – the re/insurance sector with the capital markets.

Since the Bermuda Stock Exchange (BSX) entered this segment of the market eight years ago, we have sensed the global capital markets becoming more comfortable with ILS as an asset class and as a key part of their investment portfolio.

The growing acceptance of ILS by the capital markets has evolved this market segment to a pivotal point in its history, by allowing ILS vehicles to become a component in bringing much needed insurance coverage to parts of the world that are developing, under-insured or particularly prone to natural disasters.

Capital market participation can be a source of funding to help narrow the exposure gap that exists in parts of the developing world or for populations that are vulnerable.

Regulated exchange platforms, like the BSX, can play a role in creating the bridge to support capital flow to where it is needed most.

Exchange involvement

It is an ideal time for exchange involvement – Bermuda has worked hard to develop a world class regulatory environment without jeopardising its reputation for innovation and bringing products quickly to market that meet and exceed the needs of global clientele. For example, the island has become Solvency II equivalent, which allows Bermuda commercial reinsurers and insurers to be able to compete on an equal footing in Europe in writing business.

These strengths have allowed Bermuda to support all areas of specialty re/insurance and now ILS and has underscored why Bermuda is known as the World’s Risk Capital. In respect of the BSX, our business has grown and we are now sensing a greater acceptance by the capital markets to invest in securitized risk transfer vehicles.

Now could present an excellent opportunity for the capital markets and re/insurance industries to continue to work closely together to provide the valuable resources required to provide protection to areas in need and to narrow the global exposure gap.

Bermuda is well placed to continue supporting innovative ideas and products consumed by capital market participants to deploy assets into the re/insurance sectors. Recognised as the third largest insurance market behind only London and New York, the island is the ideal location for the creation, listing and trading of securitised insurance related instruments.

The BSX plays a key role in Bermuda’s success in supporting global capital market transactions with over 700 issuers, including more than 150 ILS listings – representing close to 70 percentof global issuances at a value surpassing $19 billion listed. The BSX embraces new market innovation and offers listed issuers speed to market – with listings taking as little as two weeks to complete.

These figures are a clear indicator that the capital markets have become more comfortable with investing in risk transfer vehicles and the usage of the BSX as an exchange platform.

While many would like the market to develop quicker, the pace has so far been more measured, the majority of BSX-listed ILS vehicles are property-catastrophe centric. That said, new issues have come to market that exhibit regional diversification - for example, the BSX has listed bonds linked to the Turkish Catastrophe Insurance Pool, which covers Turkish quakes, and also another deal transferring risk in relation to Italian quake activity. Last year also saw the first Chinese focussed bond listed on the Exchange.

Continued developments such as the above shows the industry’s willingness to evolve and grow. Risk and product diversification will ultimately lead to greater capital market participation. A regulated platform that allows investors to exchange risk while offering key exchange support such as oversight, price discovery, distribution capability and accessibility to the secondary market, will only help drive more interest to the ILS asset class.

Despite previous attempts to provide platforms to support the trading of risk, the industry has organically evolved to a point where the time seems right once again to look at a solution that can provide capital market investors with exchange access and support similar to that of other asset classes in organized markets. An organized, regulated platform would go a long way in providing a more structured secondary market platform supporting a more fluid entry and exit point for investors.

Deepening understanding

Global ILS investors have become increasingly comfortable and sophisticated in their understanding of ILS structures, but there is always work to do to deepen understanding of the vehicles to encourage additional interest in the asset class. Continued education, vehicle and pricing transparency are all key elements to increasing comfort levels of investors.

The capital market has shown its commitment to understanding the ILS asset class and as a result allocations have grown. This growth reinforces that the asset class has developed to a point whereby it is no longer “alternative” or just a fleeting trend.

As a result of the maturation and broader acceptance of ILS as an investable asset class, it stands to reason that as products are brought to market investors will look at them with interest. This will help drive the ability of capital to flow into the market to be deployed where insurance is needed. Developing markets, regions and populations stand to directly benefit from this.

It appears to me that the global capital market and insurance industry are on the cusp of being able to create a remarkable solution to a worldwide problem by combining what they both do best to provide solutions to places and populations most in need.

Bermuda has always worked hard to evolve with the changes in the industry and has been a key component in driving the development of the ILS sector. I am interested and energized to see this bigger vision for the industry come to fruition – and I believe there is a unique opportunity for both the re/insurance and capital market industries for corporate growth, while providing broader support to communities and businesses globally.