London’s efforts to develop a market for insurance-linked securities (ILS) has been “hampered by bureaucracy” according to a new report from the market-wide body that represents the London specialist commercial insurance and reinsurance sector.
The London Matters 2020 report from the London Market Group (LMG) and consultancy McKinsey explains that London was reacting to a perceived threat from offshore insurance-linked securities (ILS) domiciles when it launched its own UK insurance-linked securities (ILS) regulatory and tax framework in time for the 2018 underwriting year.
But while these arrangements are seen as “globally competitive” the London Matters 2020 report acknowledges that London and the UK’s ILS ambitions have been held back.
“ILS development has been hampered by bureaucracy, applications being seen as rather onerous and costly,” the report explains.
Adding that, “As a result, not all insurers, reinsurers and fund managers are persuaded that operating through a UK-based risk transformation vehicle is as cost efficient and flexible as that in other countries.”
So far just a handful of issuances have been transacted in the UK using this ILS regulatory and tax regime, including two Atlas catastrophe bonds from French reinsurance firm SCOR (Atlas Capital UK 2018 PLC (Series 2018 ISPV 1) and Atlas Capital UK 2019 PLC (Series 2019-1)), the first terrorism risk catastrophe bond sponsored by Pool Re (Baltic PCC Limited (Series 2019)), as well as Neon’s collateralised reinsurance sidecar that was placed and also renewed, and Brit’s multi-use Sussex Capital collateralised reinsurance Protected Cell Company (PCC) vehicle established in the UK. One other protected cell company, Fuchsia Capital was also registered for re/insurer Beazley, but to-date hasn’t been used.
The last cat bond issuance was now one-year ago and SCOR has now returned to Dublin, Ireland for its latest catastrophe bond transaction in 2020, perhaps a reflection of the more onerous process in London up to now.
But the London Matters 2020 report suggests that the situation is likely to improve going forwards, citing the following reasons.
First, the UK government is said to be “actively engaged in the ILS market and is working on improving it” which is essential for the process to match the speed of issuance sponsors look for in other domicile locations.
In addition, the report says London can access global insurance and reinsurance markets, “not just those in North America (which, to date, have fed ILS in Bermuda and other markets).”
This isn’t really an accurate statement, as it is the ILS market’s focus on U.S. property catastrophe risks that has driven issuance, not the fact Bermuda is adjacent to it.
In fact, Bermuda has played host domicile to numerous transactions from across the world over the years and now we even see the emerging Singapore ILS market playing host to transactions featuring risks from the United States as well.
London is clearly well-connected and has the world’s largest dedicated insurance and reinsurance market, but it’s important to be factual about the reasons for a U.S. concentration of catastrophe bonds, part of which is down to traditional market dynamics and ILS investor appetite for peak catastrophe zone risks that pay an adequate return.
The report says “this gives London a competitive edge,” which again is true, but doesn’t necessarily mean we’ll see a flurry of diversifying, non-cat ILS deals in the UK.
In addition, the report cites the spread of business across life and non-life in the London market, which is again a positive but isn’t itself a guarantee of diverse ILS issuance coming to market as this will be driven to a degree by what investors want access to and what works from a cost-of-capital perspective.
The report also claims that London’s ILS regime is more advanced as it allows multiple-issues from a single structure, saying that this is “an important design difference” between its regime and Bermuda’s.
But of course ILS funds have been transacting collateralised reinsurance in multi-use vehicles in Bermuda for a long time already, maybe not in the same structure, but it seems inaccurate to claim it hasn’t been happening.
Finally, the report cites the fact most ILS marketplaces are offshore, which it says can “create additional cost and complexity due to some countries’ restrictions on transacting with offshore territories.”
“London ILS business does not incur such costs,” the report explains.
Which is definitely beneficial for many sponsors. But, reducing costs in one area of the ILS issuance process is currently offset by the increased bureaucracy, onerous application process and slower time to market currently seen in the UK.
For London to really gain ILS market traction it is going to take the process being made easier, less onerous and better designed to match both cedent and investor needs.
A competitive offering needs to match domiciles like Bermuda and Singapore, in terms of speed to market, while also offering a tax neutral approach for the end-investors.
It would also likely help to focus on what ILS funds and investors really want, rather than driving the initiative from the point of view of the London market itself.
The upshot is that ILS is not going away and the London market uses a significant amount of ILS capacity itself, transacting in offshore domiciles to access it in many cases.
Make the transacting of ILS work just as efficiently in the UK and deals will certainly follow, removing the bureaucracy is certainly a good first step.
Then allow ILS market participants to work out how to benefit from new found direct access to the world’s largest insurance and reinsurance marketplace, rather than trying to force a certain way of working designed to suit London’s re/insurance community onto them.