Webinar: London seeks foothold in booming ILS market

The market in insurance-linked securities (ILS) has bounced back in spectacular fashion in the wake of last year’s hurricane losses.

The UK, meanwhile, has thrown its hat into the ring with the introduction of new ILS-friendly legislation. Can the UK compete with established ILS jurisdictions like Bermuda?And will another cat-heavy year scare off ILS investors hurt by last year’s losses?

In collaboration with Clifford Chance, Insurance Day brought together a panel of top experts to debate this and more. They are:

• Jean-Louis Monnier, global cohead
of ILS at Swiss Re
• Des Potter, head of GC Securities
• Malcolm Newman, managing director
of Scor’s EMEA hub
• Rob Procter, founder of Securis
• Katherine Coates, partner at
Clifford Chance.

This article is the first of a two-part series. Pick up Insurance Day next week for more from our panellists when they will be discussing topics including new perils, new technology, rising interest rates and the impact they will have on the ILS market.

Lorenzo Spoerry: “Malcolm, you chaired the taskforce that worked with the government to bring in the new rules. What do you think the UK’s unique selling points are, really?”

Malcolm Newman: “First, we had to make sure the offering in the UK at least matched the offerings from other locations. We had to have strong support from our local regulator and we had to make sure we had an optimised tax position. I think we’ve achieved all of those.

“You have in London a unique ecosystem. You have in a small, concentrated area a huge amount of expertise but also direct access to capital markets, so it allows those experts and those capital providers to more easily work together and to innovate within the ILS field. London and the UK will succeed by bringing new ideas and new thoughts to the ILS market, not simply by being a clone of other locations.”

“London and the UK will succeed by bringing new ideas and new thoughts to the ILS market, not simply by being a clone of other locations”
_{Malcolm Newman
Scor}

Spoerry: “So, possibly new perils coming to market rather than the standard nat cat, perhaps?”

Newman: “That’s what I’d like to see. We’ve been working as a taskforce with the government, trying to expand the pool of insured risks. I think there’s a huge opportunity for all of the insurance community, if we can get some of the uninsured risks into the ILS market."

Spoerry: “One of the issues a lot of people in the market are talking about is the six to eight weeks the regulator gives itself in the UK to approve new ILS transactions, which is rather more than in other jurisdictions such as Bermuda. Katherine, you’ve dealt with the Neon and Scor transactions and you’ve also played a part in drawing up the new rules. What have you learned about the regulator’s approach during this work?”

Katherine Coates: “I think the regulations have put in place the right sort of framework. They include a degree of flexibility on the process and the timing and the big question was whether the regulator would be able to perform as anticipated in the regulations.

“We’ve been really pleasantly surprised by the co-operation we’ve achieved with the regulator and with the speed. The Neon transaction took about three weeks. The Scor transaction took about four weeks from providing documentation. It’s clear we have a regulator that’s going up a learning curve but it has set up a dedicated team, been very responsive and shown a willingness to learn, a willingness to understand what the industry wants to achieve.

We’ve been really pleasantly surprised by the co-operation we’ve achieved with the regulator and with the speed”
_{Katherine Coates
Clifford Chance}

“Understandably, as it is learning and as it is working out what it should focus on, it has perhaps been a little more cautious than an experienced regulator would be. We are already seeing signs it wants to streamline the process. It is now understanding where the key points it needs to really focus on are and it is looking proactively to work with us to try and make sure the process is efficient. All of that is really encouraging.”

Spoerry: “There were concerns investors had from a legal perspective about London. What are those exactly and are they valid?”

Coates: “The regulations have created a level playing field with other jurisdictions but a lot of it comes down to the practical flexibility with which the regulator operates. And so, I think there were concerns that some of the market practices wouldn’t be available in the UK. Again, it’s early days but I think we will end up with a fairly balanced position. It is going to be a cautious and respected regulator but at the same time, as it gains in experience and familiarity, it will be much more able to work with more innovative structures, for example.

“One potential issue investors may have had was around whether they would adjust to English-law style structure and documentation, particularly around the security arrangements and establishing the segregation of the cells.

“But from our experience on the two transactions [Neon and Scor], there has been no problem at all with US investors, for example, adjusting to English law structures and documentation.”

Spoerry: “Des, you’ve been a member of the London Market Group’s ILS taskforce since the start. What do you think London’s strengths are likely to be in the long term?”

Des Potter: “London does have a unique ecosystem of talent and experience. But fundamentally, what we’re trying to do is not compete with Bermuda, we’re trying to grow the demand for reinsurance and risk transfer to the capital markets and that is about finding innovative new solutions to transfer effectively the right capital, or to use the right capital to match the right risk at the right price.”

“Fundamentally, what we’re trying to do is not compete with Bermuda, we’re trying to grow the demand for reinsurance and risk transfer to the capital markets and that is about finding innovative new solutions to transfer effectively the right capital, or to use the right capital to match the right risk at the right price”
_{Des Potter
GC Securities}

Spoerry: “Jean-Louis, you have a view of all this on a global scale. What do you think about this idea London is best off doing its own thing and is not going to compete with Bermuda head-to-head?”

Jean-Louis Monnier: “In a way London is competing with the other jurisdictions and as an arranger, we think it needs to be efficient. This is a jurisdiction that we recommend among others to sponsors. I think there is great potential, for example, for Lloyd’s to have access to a local domicile. I think the success of London will come from having the ecosystem of the financial and insurance sectors in London.”

Spoerry: “Rob, you see this from the investors’ point of view. What do you think is London’s unique selling point?”

Rob Proctor: “The key attraction of London, as far as we’re concerned as a manager of ILS assets, is the broad availability of talent.

“The key attraction of London, as far as we’re concerned as a manager of ILS assets, is the broad availability of talent”
_{Rob Proctor
Securis}

“We source capital from investors around the world in many different market places. We have fund structures that are based in the Caymans; we have cell or we use cell entities that are based in Bermuda and Guernsey currently. We’d love to add London to that list – we haven’t done so yet but we’re very open to using those structures.

“We think it makes a great deal of sense to continue developing this marketplace. Our hope is that this is not just a mechanism to replace or directly compete with other jurisdictions. We see this as a mechanism for improving or growing the market overall. I think that’s incredibly important. A huge amount of risk is still uninsured, particularly in the property cat world globally, and especially in developing markets. We’d love to change that.”

Spoerry: “Malcolm, were you surprised by the bounce-back of the ILS market in the wake of last year’s natural catastrophes?”

Newman: “Investors know the nature of risk that they are in and it is still an attractive investment class. I don’t think that the fact that you’ve had a particularly intense cat year would necessarily put people off that particularly class. That’s one of the reasons why it carries a risk premium over government bonds.

“The losses might actually encourage other investors to come in and say ‘well they didn’t all lose all their money – this was actually well managed and well organised’ and is something that they as an investor need to think about getting involved in.”

Spoerry: “Rob, is this your view? Are your investors keen to recommit to the market and would they be keen if we saw another big loss again this year?”

Proctor: “In this space, the end investors are sophisticated. In large part it’s pension funds that are investing. They’ve taken a great deal of time and effort to understand the space. They don’t expect an asset class that never has losses; they expect an asset class that is uncorrelated with other asset classes. That’s the key attraction.

“If this year were another one with significant losses like 2017, I think investors would consider that carefully. I think they understand you can have two bad years in a row – we saw that in 2004 and 2005 – but undoubtedly, some investors, perhaps less sophisticated ones, might be less keen to carry on. The quid pro quo of that is other risk-takers might see this as the best moment to benefit from the most attractive pricing.”

Spoerry: “One of the interesting features of last year, actually, was the number of new perils that we saw come to market. Jean-Louis, do you think that there is a lot of potential to bring to market new perils like terrorism, cyber, life?”

Monnier: “Investors are quite keen to source diversifying perils. We have seen a trend to include more perils, typically with a view of having the ILS terms matching the terms on reinsurance. For certain insurance for residential property, we have moved progressively to all natural perils, modelled and non-modelled.

“Beyond that, would investors be happy to take on terrorism risks, for example? Some would, some would not, it depends what guidelines they have. But, definitely, a big part of the market would be open to take some element of man-made risk.

“Cyber is an interesting one because cyber risk is not going to go away, it will only increase. It is tricky to handle for reinsurers because there is exponentially great accumulation of risk, so,we know it is going to grow and it is very suited to syndication. Spreading risk among many holders is what capital markets allow. The issue with cyber is definitions – what you actually cover – and modelling.”