In the latest in our series of interviews with figures from the risk transfer and insurance-linked securities (ILS) and reinsurance markets, Artemis spoke with the ILS management and administration team at Artex Risk Solutions.
Artex, the insurance management division of Arthur J. Gallagher & Co., acquired independent insurance and reinsurance manager Kane’s ILS and insurance management and administration business, and Hexagon Insurance PCC Ltd. earlier this year, enhancing its ILS market capabilities.
Artemis spoke with members of the Artex ILS team, including Paul Eaton, New Business Director, Linda Haddleton, Managing Director for the Cayman Islands, Justin Wallen, Head of ILS for Guernsey and Robert Eastham, Managing Director, Bermuda.
We discussed the impacts of recent acquisitions on the company’s ILS business, divergent regulatory factors in different domiciles, the role Artex plays in the expanding ILS sector and also market trends the team are currently seeing in the space.
Can you tell us a little about the background of shift to Artex ownership and how the ILS management business has benefited from that?
Paul Eaton: Artex was keen to add to and further diversify their range of insurance management services. The acquisition of both Hexagon and Kane’s insurance management operations have helped achieve that strategic objective by establishing Artex as a leading ILS service provider with a team experienced in ILS dating back to 1996.
For the Kane and Hexagon teams the significantly increased financial strength and stability offered through Artex’s ultimate ownership was a key factor in the decision-making process.
The ability to offer ILS services in 3 key domiciles is a considerable advantage to our clients, offering different time zones, different insurance vehicles plus a large combined resource – all operating to the same responsive, high-quality service.
We are also able to offer access to many other popular captive domiciles including Malta and Gibraltar with their ILS legislation, plus a range of other insurance management services which may appeal to existing ILS clients.
What do you see as the key disciplines or areas of expertise required in the management of ILS vehicles and facilitation of ILS transactions?
Linda Haddleton: For Artex the key discipline is responsiveness when it comes to facilitating an ILS transaction, to reduce execution risk. We are focused on making sure that the transaction is turned around as quickly as possible by ourselves as Manager of the ILS vehicles.
Having facilitated so many collateralized reinsurance and cat bond transactions we have become experts and can also add great value when it comes to reviewing and commenting on the transactional documentation, particularly the reinsurance contracts and reinsurance trust agreements we utilize so frequently.
It doesn’t stop with just getting the ILS transaction finalized, our clients expect the administration of each vehicle to be top-notch, from the provision of regular accounting information and valuations, to taking care of the company secretarial and corporate governance aspects. Equally as important is our emphasis on collateral management and facilitating the collateral release back to investors at the end of the transaction life cycle.
You operate in multiple domiciles now, how do regulatory differences affect what you do?
Justin Wallen: Each of our domiciles in Bermuda, Cayman and Guernsey have adopted an ILS supportive regime and so whilst there are differences between those domiciles, each has managed to create an environment where the regulation of ILS vehicles is conducted in an efficient manner.
We operate with a domicile neutral approach offering our clients objective advice on the domicile that would best suit their needs. In practice something like a large fee differential between regulators in different domiciles could potentially affect how we view where these transactions should be based.
We are also aware that Gibraltar and Malta, where we have existing offices, are keen to attract ILS business to their domiciles and specifically where a direct insurance contract into the EU is required then they have an advantage.
The Private ILS trend continues apace. As ILS managers grow, the number of cells or vehicles their capital is deployed into is increasing rapidly. How does Artex help ILS managers and investors with this?
Justin Wallen: Collateralised reinsurance is the largest part of our ILS business so it has our full focus and attention for each and every transaction to make sure that we are providing market-leading service.
Generally in practice what that means is setting up a new protected cell / segregated account for each transaction, reviewing the reinsurance contract and reinsurance trust agreement (RTA) / letter of credit and liaising with Brokers/Trustees to make any changes that we see fit to the contractual documentation, holding the necessary approval meetings in the domicile, advising the regulators accordingly and managing the process to try and minimize the time between when a transaction is originated to execution.
We have a variety of SAC/PCC structures that our clients can use, with a range of investment options all tailor-made to our clients specific needs.
What trends is the Artex ILS team seeing play out in the ILS market currently?
Robert Eastham: There is no doubt that there is still plenty of capital ready to be deployed, with perhaps more organic growth within the existing funds rather than new funds hitting the market. We have seen transactions being offered with expanded coverage in terms and conditions with no noticeable increase in rates on line.
Possibly as a result of that, in Guernsey we have seen less new business than in previous years but instead there has been substantial upsizing of capacity in existing deals upon renewal. In Bermuda we see continued strong capacity increases and transactional growth.
There has also been a move to diversify the types of risks being written – gone are the days where we were only writing property cat business with a trend towards other classes of business including marine, energy, terrorism, crop and other speciality covers. We have also seen strategies where investor capacity is trying to get closer to the primary insurance risk.
Furthermore, we have seen strong underwriting discipline and willingness from the ILS investors to walk away from a transaction on the basis of altered terms and conditions within a contract, rather than just rates on line, which is perhaps reflective of the maturity and sophistication of the current ILS market.
Are there still regulatory barriers in doing ILS business and what could domiciles do to make life easier for Artex and its clients?
Linda Haddleton: We work very closely with our regulatory colleagues in each domicile and are very pleased with how things are working.
As the ILS market develops and matures, how has the Artex service adapted to meet manager, investor, and ceding company needs?
Robert Eastham: Speed of execution and frictional costs are key components of our ILS business today and in the future. We are also cognisant of the collateralisation costs the ILS markets face and the ceding company transaction burden in dealing with ILS markets.
In the short-term we will continue to maintain close links with all service providers in the ILS chain and seek cost efficiencies from both structural engineering and economies of scale. In the medium term we are of the opinion the solution to these will come from developments in technology and our new expanded service team intends to continue at the forefront of technological advances as we have been with innovations such as our Cat Bond Lite product and listed transaction capability.
Furthermore, as part of Artex we are now able to offer not just regional but global solutions supported by committed long-term, financially strong owners. This is a change which has been well received by all of our counter-parties, both in the investment community and throughout the insurance market.
Our thanks to the Artex ILS team for their time.
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