Bringing insurance-linked securities (ILS) to London is clearly a hot topic and an important step for the regulators and facilitators in making London a modern, capital agnostic hub for global insurance and reinsurance business, but is it going to be enough to offer a competitive advantage?
ILS and the new regulations are deemed a competition initiative by the Bank of England Prudential Regulatory Authority (PRA), which puts “facilitating effective competition” as one of its objectives for helping finance to thrive in the UK.
Of course competition is vital, especially say with the Brexit threat looming. But where ILS is concerned, is starting off with the aim of becoming more competitive always going to end up with the best result? Or perhaps it’s admitting that currently you’re not?
The ILS market is extremely well-served by specialist domiciles that offer a range of options for cedents looking to tap the capital markets for reinsurance capacity and for institutional investors or fund managers looking to access and manage portfolios of insurance risk.
These options continually expand and it’s definitely worth London being able to offer this, as part of its menu of structures and transactions that can be completed and facilitated in the city.
But, the holy grail and competitive advantage of bringing ILS to the UK and London, will only truly be realised if it can offer something that no other domicile can.
When this whole process began, it looked like London was trying to innovate with ILS, as the initial documentation about the transformer structure that was being planned suggested that the vehicle may in future become an entry point for capital into the London and even Lloyd’s insurance and reinsurance market.
That would have been revolutionary, enabling those underwriting at Lloyd’s to partner with the capital markets more easily, cost-efficiently and with reduced friction. It would truly have been something no other ILS domicile could offer and would likely have been an attractive option for almost every ILS fund manager or major ILS investor, as access to Lloyd’s market business is a key draw.
Later versions of the London ILS regulation proposals have become more of a copycat structure, offering the ability to transact collateralised reinsurance from London in a UK regulated financial vehicle, but one that is really just akin to the vehicles used elsewhere.
As we said, this approach of catching up to offer London as an alternative ILS domicile does have value, in fact leveling the playing field is a significant step. It’s what every other offshore domicile that has targeted ILS has done so far.
But, it does seem a little lacking in ambition and with reports suggesting that London’s ILS approval process could be particularly slow and onerous (compared to other domiciles), it seems likely the UK will have its work cut out to attract new ILS business.
If the development of the structure had followed an objective of being innovative and creating something entirely new for the ILS market, it could have positioned London very quickly as a leader in ILS, with something guaranteed to draw in new business.
As it is, the ILS regulations that look to be on the way (perhaps as soon as this month) are more likely to see London becoming one of the ILS location options, among many, which will no doubt see some deals done in future. But will that really help the London financial market’s competitiveness?
Competition for a share of an existing pool of business is never as interesting as wholesale innovation and trying to offer something entirely new that grows the pot for everyone.
It would have been nice see a truly innovative take on a structure for facilitating collateralised reinsurance in London, with fast approval, efficient facilitation, an enhanced access to the Lloyd’s market, and all the bell’s and whistles that would attract new business, as well as take a share of the existing ILS pot.
But unfortunately that does seems a way off. The PRA’s Deputy Governor Sam Wood’s spoke at the London Business School recently and highlighted the London ILS work as an example of the regulator facilitating competition.
Yes it is, but evidence of the value of this effort will be in the uptake and usage, which most agree would be a lot higher if London were able to offer something that can’t be found elsewhere in the ILS domicile world.
We understand that the ILS initiative had originally been looking for much tighter integration of an ILS structure with Lloyd’s, but sources said the market was not looking for such tight integration at this time and senior representatives at Lloyd’s pushed back on this angle of the regulations.
It’s not long now till we’ll see how effective the UK’s ILS regulator regime will be. The expectation has been that the UK government would publish the finalised regulation any time now, perhaps this month, although the announcement of a UK general election of course has the potential to change things now.
Once the regulation is in place and ratified we fully expect to see some ILS deals done. There are some ILS fund managers and investors who would benefit from London being an option for transacting ILS and collateralised reinsurance deals, as well as some ceding companies that might look favourably on a UK domiciled structure.
But will this not insignificant effort to launch an ILS structure truly enhance the UK and London’s position in the global financial markets? With what has been seen so far, and the feedback market players provide, it feels like that might be a stretch.
We would like to see it proved otherwise, with London offering a competitive alternative to established ILS domiciles, as that would be good for the entire ILS market and likely enable and encourage further market growth.
However, its success may come down to whether it can attract local cedents and investors or ILS fund managers to use the structure, as so far it looks like outcome will purely be a new location and regulatory regime for transacting under. This is where the competitive advantage of the regulations may lie.
It would have been great to see an innovative and new offering of a unique solution, for ILS markets from anywhere around the world, not just the replication of something that can probably be more efficiently transacted elsewhere.
But we are realistic and understand that in the current competitive and protectionist reinsurance market environment, encouraging Lloyd’s to add a side-door for the alternative markets was always going to be a tough task at this time.
Perhaps something for the future, as we wrote recently here, “Mechanisms and structures to facilitate the entry of alternative capital into Lloyd’s more efficiently would not just benefit ILS players and investors, but also the underwriters who could do with a more efficient source of capacity right now.”