Some insurance-linked securities (ILS) market participants have expressed uncertainty as to whether London’s ambitions of becoming a global ILS hub will be beneficial to investors and the asset class, noting Brexit as an additional challenge for ILS in London.
Executives and experts within the ILS space recently discussed numerous market issues with Clear Path Analysis for its latest report, and the establishment of an ILS marketplace in London and the impact this might have on investors was a common theme.
Since London announced its plans to develop ILS regulations and frameworks there has been much discussion about its ability to compete with other ILS domiciles in a rapidly changing, and technologically advancing risk transfer world.
Issues such as speed to market, cost, and the need for a favourable and competitive regulatory environment in London had been raised and debated, and the UK’s vote to leave the European Union (EU) added greater uncertainty to London’s ability and position as a global re/insurance hub, and future hub for ILS business.
“Depending on the outcome of Brexit negotiations, the impact on investors will be very different. The UK ambition to put legislation-improving conditions for structuring ILS in London is certainly interesting, since this could possibly establish a highly profiled and respected domicile within the EU internal market. Provided that the UK maintains access to the internal market, I believe this would be of help to investors and to the asset class overall.
“If UK leaves the internal market, the outcome is much more difficult to analyze. Should the UK choose the tax and regulation slashing path hinted by some, it will probably make no difference at all to investors,” said Robert Lindblom, Partner, Entropics Asset Management AB.
Regulatory uncertainty and issues surrounding passporting rights for UK companies post-Brexit are clearly a top concern for insurers and reinsurers, and the same challenges need to be addressed if London’s ILS goals are to be achieved.
Dr. Bob Swarup, Principal, Camdor Global Advisors, explained that London has always been an innovative marketplace, but added that Brexit does “change the complexity a lot.”
“There is no legal framework for life in Europe post-Brexit and no idea of what is going to be decided.
“Until they get past some of the more basic uncertainties, the ILS market will always be hampered, in a sense. One of the challenges of Brexit for most insurance companies is that even if you believe that London firmly stays as pre-eminent as it has in the European landscape, you likely run the risk of regulatory divergence going forward.
“Right now, in the U.K, insurers live under Solvency II, but what happens if the U.K leaves the Eurozone and no agreements about passporting is reached?” continued Dr. Swarup.
Interestingly, Dr. Swarup explained that Bermuda’s transition to such a large ILS market is a simple example of how regulatory issues can be somewhat of a double-edged sword.
“When the U.S began to change some of their insurance regulations decades ago, many U.S. insurers ran to more friendly climes for their investments while keeping their core operations in the U.S. Britain may yet reap a dividend in time, and it is an area we continue to watch,” explained Dr. Swarup.
Outside of the potential impacts and added complexity Brexit brings to the ILS London debate, Dr. Floyd Tyler, President and Chief Investment Officer (CIO), Preserve Partners, fails to identify what any regulatory advantages or disadvantages might be.
“It will be just another place to go shopping. I can’t see what the regulatory advantages or disadvantages would be. Maybe there are some U.K.-based or Europe-focused investors who feel comfortable with the close proximity of London, but really, I see it just as another place to shop,” said Dr. Tyler.
Eveline Takken-Somers, Investment Director, Credit & Insurance-Linked Investments, PGGM, said in the near term, she is unsure if London as a new ILS market would help or hinder the asset class, adding that any potential benefits “depend on the structure that the London market will present to investors.”
“In an efficient market, the market will follow the most efficient path to transfer the risk. I believe that it is a good effort to create an additional market place. This may lead to more competition and could potentially lower costs as well.
“At PGGM, we don’t have a preference for one market over the other, as long as the mechanics of such a market are efficient. We would welcome the competition and would definitely research what the London market would have to offer,” said Takken-Somers.
To summarize, Lindblom said; “A London ILS market will either be very good for investors and the market overall, or no use at all. I don’t see a clear case where It would hurt investors.”
The latest report from Clear Path Analysis, the sixth annual ILS for Institutional Investors report, from can be downloaded from its website.
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