Bermuda remains at the forefront of the ILS market as it evolves: HSBC

Bermuda remains the global leader in the ILS space. Helen Goonewardene, vice president, business development at HSBC Securities Services, Bermuda, told APCIA Today why.

Why has Bermuda been so successful as an ILS domicile?

Bermuda was one of the first places to see the potential of insurance-linked securities (ILS) as a credible marketplace and quickly embarked on creating the infrastructure and expertise to establish Bermuda as the number one jurisdiction in the world with the greatest global market share of ILS.

As at September 30, 2019, the Bermuda Stock Exchange accounted for over 80 percent ($34.5 billion of $40.1 billion) of the total outstanding volume in the global market.

Bermuda keeps aligned with market transformation and evolution through innovation and having the right infrastructure in place to support this industry.

The Island has a rich history of supporting the global risk markets by creating new breeds of reinsurers, new capital efficient structures and startup companies to match the changes in the sector.

For example, as the ILS market and sophistication of its investor base has evolved, the Bermuda Monetary Authority introduced new classes of insurer: a fully collateralised reinsurer class (collateralised insurers) and an innovation class (class IIGB) in addition to a new category of intermediary, insurance marketplaces.

The benefit to the industry is that they can be used for multiple transactions, by multiple cedants and may also transact with unrated, non-affiliated cedants. This is an example of Bermuda working together to evolve and adapt to change, while ensuring that we maintain a strong framework with regulations that remain fit for purpose.

How would you characterise the current state of the global ILS market?

The challenges with adverse developments, loss creep and trapped collateral were felt particularly in the cat bond market, where an estimated 15 percent of collateral remains trapped. As a result of this, in 2019 we observed investors reducing their allocations or withdrawing completely.

Additionally, investors have been demanding better transparency on the risk profiles they are investing in and a rate of return that is reflective of the risk they are taking on.

According to the Artemis deal directory, for the first nine months of the year, catastrophe bond and ILS issuance declined by more than $4 billion in 2019, when compared with the same period in 2018.

There is evidence that the sector has evolved beyond the P&C side and into other realms of risk, such as mortgage insurance risk.

The latest issuance is Bellemeade Re 2019–4, an Arch Capital Group mortgage ILS deal, the fourth issuance of its kind for 2019 alone. Mortgage insurance-linked notes accounted for almost three-quarters of deal volume in the first three quarters of 2019.

Meanwhile, the public sector is increasingly looking to ILS to mitigate risk via collateralised reinsurance, parametric protection and cat bonds. Regular headline reports indicate that the World Bank, the Caribbean Catastrophe Risk Insurance Facility, the UN and others are keen to use ILS as a layer of reinsurance to help reduce risk and losses.

Has demand for ILS products been affected by recent cat losses?

From a banking perspective, it seems that the market has paused and refocused in 2019, following the loss events of 2017/18. The entire value chain is constantly being scrutinised with technology seen as a key tool to drive efficiencies, and banks are not immune to this. Our ability to innovate and enhance collateral management solutions is a key differentiator for our clients.

Currently, the trustee business is quite commoditised, but we are seeing an increase in product innovation, in terms of the development of new solutions such as separately managed accounts that return higher yields, considerations made to offer liquidity solutions from a rollover perspective and know your customer data centralised to improve the on-boarding efficiencies for our customers.

HSBC Issuer Services has a long track record of providing service and insurance trust solutions for our collateralised reinsurance clients. Through its insurance trust and escrow capabilities, HSBC can assist clients with their risk management (ie, mitigate timing risk, counterparty risk, etc). With its sizeable global network, HSBC is able to support transactions across a diverse range of markets.

Most significantly, the bank’s robust balance sheet and strong credit rating make it an ideal counterparty from a risk and asset safekeeping perspective.

Since the inception of ILS in Bermuda, HSBC has been a leading bank supporting the continued growth of this industry. We have observed the ILS sector’s evolution as it has expanded into new risk perils, and new markets, with deal origination from jurisdictions such as London and Singapore.

We look forward to our continued partnership with some of the world’s most reputable organisations as we look to further grow and develop our products and solutions for this important asset class.