London could lay claim to Bermuda’s mantle as the global hub for insurance-linked securities, according to a reinsurance expert.
Des Potter, of global risk advisor Guy Carpenter, said the new regulatory framework due to be introduced by the UK capital next month could see London become a major player in the sector — but only if the UK regulator become more responsive.
Bermuda introduced its own ILS framework in 2010, since when it has become a world leader in the sector. ILS, including catastrophe bonds, issued from the island represented 74 per cent of outstanding global capacity at the end of the first quarter, according to the Bermuda Monetary Authority.
New ILS issuance was nearly $10 billion in the first half of the year — a record pace, according to risk transfer website Artemis.bm, which said the market reached a record high of $29.3 billion by June 30.
“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,” Mr Potter, head of GC Securities and a member of London’s ILS Task Force, said.
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 UK’s ILS framework is awaiting approval in the British 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.
“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 skill set we have in London,” Mr Potter said.
“London’s ILS framework will be vital in enhancing the City’s standing in the global reinsurance market. The big challenge is whether the UK regulator can provide the speed and certainty required to enable the UK to compete effectively with other ILS jurisdictions.
“The UK has a strong global reputation, but as the ILS market evolves, the regulator will need to be far more responsive than it is today.
“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.”
The London Market Group’s London Matters report found that London’s share of the global reinsurance market fell from 15 per cent in 2010 to 12.3 per cent last year. The lower cost of capital in ILS business transactions in rival jurisdictions like Bermuda was seen as a key factor.
A report by the Bermuda Business Development Agency, published last year, found that the ILS sector generated 400 jobs on the island in 2015 and more than $100 million in payroll.