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Original Risk: A Society for Change Agents

LMG sets up London cat bond & ILS group, a chance to think bigger


The London Market Group (LMG), an organisation established to look at London’s role in insurance and reinsurance, has now established a task force to look at progressing initiatives to make London a more attractive hub for catastrophe bonds and ILS.

In a report commissioned by the LMG and published in November 2014, the London Market Group identified that catastrophe bonds and insurance-linked securities (ILS) are an area of opportunity for London. With much of this business destined to be transacted offshore, it was felt that London could do more to become a hub for ILS.

The report explained that London should; “Embrace the rise of alternative capital in order to take advantage of deep capital markets, build capacity in capital scarce lines and protect against extended soft market cycles.”

Following that, the UK Government announced in its most recent budget that it intended to target catastrophe bonds and ILS as an opportunity for bolstering the London insurance market and London’s role as a financial market hub.

The budget explained; “The government will work with the industry and regulators to develop a new competitive corporate and tax structure for allowing Insurance Linked Securities to be domiciled in the UK.”

Now, it’s been reported by Reuters this morning that the London Market Group (LMG) has taken up this initiative and established a task force to look at catastrophe bonds and ILS, as well as London’s role and opportunity in this market.

Artemis spoke to LMG projects contact Barry LePage this morning, who confirmed that a group of industry experts and government representatives would be meeting regularly to discuss the best way for London to encourage catastrophe bond and ILS business to the city.

The working group that has been set up includes representatives from the UK Treasury, specialist ILS fund managers, law firms, insurance and reinsurance firms and brokers. No end-investors have been engaged, preferring to focus on those bringing deals to market, rather than those providing capital.

Sensibly, the group includes representatives from both the traditional and alternative sides of the reinsurance market, as it’s vital to engage both group’s and find a way to bring ILS to London while also making the most of its traditional reinsurance market roots and structure.

The group will discuss ways to encourage better arrangements for transacting ILS and catastrophe bonds in London, LePage explained. So far there has been one initial meeting, although LePage explained that this took place during the recent elections so there was no Treasury participation in attendance.

The next meeting of this cross-market group of London reinsurance and ILS professionals will take place in a couple of weeks, LePage said, with more progress expected to be made.

The group aims to get a working paper ready for publication by the Autumn with recommendations on how to achieve the goal of encouraging ILS business to London.

The media focus surrounding this issue continues to be based on London seeking to pull-back cat bond and ILS business from offshore centers such as Bermuda, the Cayman Islands and other domiciles. However, the government and the LMG would perhaps be better served to look at this a little more broadly and to think bigger.

Investors want to access insurance and reinsurance risks more directly and the ILS market is enabling that goal. At the same time ILS is increasing in sophistication and becoming a core part of the global insurance and reinsurance marketplace.

So, rather than simply trying to replicate what’s already being done very well elsewhere, would the efforts of the LMG, this task force and the UK Government be better spent on trying to leverage the unique history and expertise of the London re/insurance market to bring something new to ILS, which could ultimately help the market expand?

By all means create a regulatory environment and the necessary structures to allow catastrophe bond sponsors to domicile their transactions in the UK, that’s a valuable addition to the London market’s offering. But Artemis would encourage a forward-thinking, think-big approach to how London could become the world’s risk filter for ILS capital and its third-party investors.

Thinking bigger could position London uniquely as a hub for transferring risk to third-party investors, alongside its position as a key hub for transferring risk to traditional reinsurers.

Lloyd’s is already the world’s largest reinsurance market and has leveraged third-party capital for years. Could this historic market play a role in the plans for London as an ILS hub? Could a way to encourage ILS capital into Lloyd’s more readily, in order to aim for overall market growth be found?

If London could be made into a capital-agnostic insurance and reinsurance market, its efficiency and competitiveness would likely be increased dramatically and the effect may be to win much more than just cat bond and ILS transaction domicile business.

Of course thinking bigger will involve addressing the legacy of the traditional reinsurance market and making it much more open to change, new capital and new ways of transacting risk.

That is no easy task, but perhaps one that is worth undertaking, or at least considering by the LMG, as this new task force begins to discuss the future for London and ILS.

Update: The participants were named by the LMG after the first meeting tool place.

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