London has to fight its corner on ILS: Michael Wade, Cabinet Office

by Artemis on June 30, 2015

The London insurance and reinsurance market has to fight its corner if it is to remain the leading center for risk and that includes fighting to attract ILS business to its shores, according to the UK’s Crown Representative for Insurance Michael Wade.

London needs to ensure it is part of the growing insurance-linked securities (ILS) market, as roughly $65 billion of capital markets participation in reinsurance looks set to grow rapidly to $165 billion or so in the next few years, Wade said at the FT’s Future of Insurance conference in London today.

Speaking about the need for the London insurance and reinsurance market to remain competitive in the face of growing disruption and competition, Wade repeatedly highlighted the London Market Group’s ILS initiative as a key example of how London is seeking to boost its competitiveness.

“The commoditisation of reinsurance has enabled capital markets entry, that’s an enormous impact, mostly at the CAT (catastrophe) level,” Wade explained when highlighting key threats to London’s competitiveness.

The key consequences for London are that it is losing its position as the leading re/insurance hub in global terms, losing its market share.

“We have to be alert to that,” Wade continued, “We have to know that reinsurance and capital markets are mobile. We have to assume that distribution is no longer dedicated to London.”

Wade discussed the ILS work with the London Market Group, saying that it is an example of London engaging with the government to build bridges and achieve shared goals. He said that the ILS initiative is already having some success, bringing Treasury, Regulators and market participants together, but did not go into specifics.

Wade said that now the initiative on ILS is underway the challenge is to deliver. He highlighted the $65 billion market size, but noted that not 1% of this ILS business that is underwritten is currently actually domiciled in London.

Wade insisted that this issue, of ILS business being underwritten and domiciled abroad, needs to be rectified. He said that had London “tackled the reinsurance business 20 years ago, as we should have done, we would have enabled the reinsurance business to develop in London not Bermuda.”

He said; “The ILS market is a classic example of a new market, commoditisation of the reinsurance markets, we mustn’t allow it to be developed as in as we’ve managed it from here but actually domiciled somewhere else. It’s going to happen all over again” he stated.

Wade said that the domiciling of ILS “does matter”, when asked whether targeting bringing ILS legal structure vehicles to the UK is actually the main issue that needs addressing.

“If you take the heart out of the business, you will lose London as a hub, that’s the danger of this.”

“Bermuda should never have built up, or been allowed to build up in the way it has, purely because at the time no government would match a tax system that in some way enabled the business to be written efficiently in London, it was more efficient to write it in Bermuda,” Wade continued.

It’s interesting as Wade’s focus is clearly on the domiciling of ILS vehicles such as catastrophe bond SPI’s or cell structures for reinsurance transactions, rather than on how to efficiently connect risk and capital.

In Artemis’ discussions with investors and ILS managers since the LMG initiative launched, there is a strong opinion emerging that being a competitive domicile is a good thing, but that London needs to think bigger (as we wrote before here) and work out how to leverage its unique insurance and reinsurance market structure to bring the capital markets to bear in a much larger way.

The opportunity for London would seem to be in leveraging its unparalleled access to insurance risk, particularly through the Lloyd’s market, and bringing efficient, capital markets funding into that system. Thereby matching risk with the most efficient capital, in a syndicated market approach. That would seem an opportunity that only London can rise to.

ILS investors and managers we’ve spoken with have mentioned the need for the LMG initiative to work to help Lloyd’s open to new sources of capital, perhaps even at the expense of some older capital providers. The ILS market has long wanted easier access to Lloyd’s business and perhaps this is its chance to demonstrate the value it can bring.

Some of the ideas mooted by those Artemis has spoken with range for funds at Lloyd’s that are open to pension funds seeking to access a share of the market. A “whole of Lloyd’s” sidecar. Fronting vehicles with access to Lloyd’s to assist collateralized markets to access the business without the need to establish syndicates or other vehicles.

“London needs to be a part of this,” Wade explained, referring to the potential growth of ILS to $165 billion over the next few years.

He said that the work the LMG ILS working group is undertaking will result in identification of tax, regulatory and structural reforms to encourage ILS. This will also involve changes to the cell corporation structure to make them work better for reinsurance and ILS.

Wade said that the goal is that when market participants compare domiciles, London comes up as comparable in “every single way.”

“The market has to be proactive to help government,” Wade said, adding that so far discussions have been very fluent, very productive conversations.”

Wade said that London needs to be dynamic and fight for its position within reinsurance (and ILS).

Wade was asked when we can expect to see some results from the ILS working group initiatives. He said that he hopes something meaningful will come out in a combination of the Treasury Autumn Statement 2015 and the 2016 Budget.

Wade said that by this time next year he wants to be able to ask; “Why aren’t we doing business in ILS in London yet? If we’re not doing it then something’s gone wrong.”

The audience questioned further the need for London to think bigger, than simply seeking to emulate something that Bermuda has done so well, highlighting the opportunity to revolutionise insurance and reinsurance in London as an opportunity that is too big to miss.

That seems to be the opinion of many on this topic, that London needs to look to how it can cement its role as the global hub for risk transfer and re/insurance, but while also maintaining close links and leveraging the skills offered by other domiciles such as Bermuda.

Rather than seeking to go it alone, which does seem a little inward looking, London would likely flourish much faster by finding ways to cooperate with other domiciles which have established specialisms in the ILS business.

It could likely achieve this while still making its unique re/insurance market offering indispensable to re/insurers, ILS and capital markets participants from around the world, perhaps even finding ways to participate in the deals that end up offshore, while also bringing more risk to the capital markets thanks to its unique market infrastructure.

Offering a competitive domiciling service is important, but there are much bigger wins to be had by thinking more broadly about how to connect London’s re/insurance market with the capital market investors of this world.

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Andre Perez July 1, 2015 at 2:36 pm

For having helped two domiciles set up ILS frameworks, in my humble opinion, there will be two key factors to focus on in order to give any chance of success to the London initiative. First and foremost, you need to have the Regulatory Authorities on board (and on the committee!), as they will be the ones providing the framework to license and supervise ILS vehicles. Without the regulators showing commitment to provide a more responsive and flexible licensing process as well as supervisory regime (this is where Bermuda shines!), the whole project will be doomed. The second key factor will be to have HMRC on board (and on the committee!) in order to ensure that these ILS structures are tax-neutral when compared to competing jurisdictions. These will be the two main hurdles London will face in devising an ILS plan. Not a small undertaking by any mean. Bonne chance!

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