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Original Risk: A Society for Change Agents

Markets should focus on collaboration to grow ILS footprint


A recent article in a leading insurance publication suggested that Bermuda had stolen the ILS market from other domiciles, in this case London. But that’s far from the case and rather than protectionist comments, markets would be better served working together for the future good and growth of ILS.

Fist bumpBermuda has cultivated and grown its specialism in ILS as a domicile, host to transactions, home to ILS fund managers, and service provider to ILS funds or reinsurance firms with collateralised vehicles for more than a decade.

Lately it seems that the rhetoric around where the ILS market lives, or some believe it should live, has ramped up, culminating in this accusation of theft, that Bermuda had stolen ILS from London.

We say theft with tongue in cheek, as it’s entirely possible (perhaps quite likely) that this quote, attributed to Lloyd’s of London Chief Executive Inga Beale, had been intended to be delivered with a dash of irony.

But it does highlight that there is an increasingly competitive tone developing, as London targets becoming a center for ILS business.

Now there’s nothing wrong with a bit of competition in the marketplace, it’s natural and keeps people on their toes, often fostering innovation as well.

But there is a definite need for collaboration between ILS marketplaces as well, if the ILS sector is to benefit and grow much more rapidly thanks to having new geographies to transact and do business in and new opportunities to source an increasingly broad range of risks.

The ILS market is already global, with most of the larger ILS funds having offices in more than one country and structures or vehicles domiciled in a number of locations. While the end-investors come from all continents of the world and ILS’ reach is growing all the time.

As we’ve written before, in fact right at the emergence of London’s ILS ambitions, the best way London can enter the ILS sector with a splash is not in trying to take business away from another market, but rather in thinking bigger, to bring something new and innovative to ILS, that really draws on what London’s impressive insurance and reinsurance market has to offer.

But still people discuss wanting to “level the playing field” so that London has an equal chance on ILS. Which is fine, by all means replicate what is working so well elsewhere as most domiciles have now done, but an innovative edge needs to be maintained in order to provide the market with a new opportunity that helps it to continue to grow.

The London insurance and reinsurance market is perhaps the origin of risk transfer business models and therefore it is natural that ILS or capital market investor backed insurance and reinsurance be underwritten and transacted there.

But through collaboration with the likes of Bermuda, surely London can leverage what is done so well in other domiciles, while focusing on doing something really well that brings it revenue and also offers a chance for the likes of Bermuda to broaden its offering in turn, by leveraging London?

Bermuda has been highly successful in ILS and catastrophe bonds for over a decade, with a longer history in catastrophe re/insurance generally.

Meanwhile London has a huge platform, deep experience and global reach, with the highest degree of insurance and reinsurance specialism around.

There are clear opportunities for the two markets to work closely together, for the greater good of each and other, the broader risk transfer market and society as a whole.

In our opinion it would be considerably better for the ILS market if a collaborative approach was taken, as that will drive greater market growth ultimately benefiting all global players.

London and other domiciles should be looking to bring something new or different to ILS, rather than being concerned about who may have gained a head-start on their efforts and trying to replicate in order to dominate.

Technology now provides an opportunity for others to come along and through innovation offer new ways for risk and capital to be connected, ways which may not depend on geography or domicile at all. That is a threat to all incumbents, no matter how established, as Insurtech start-ups look to take the risk transfer business model to new places.

Rather than fighting over the existing pie, finding ways to make that pie a great deal bigger (while taking a good and profitable share) would be a much better use of London’s re/insurance and risk transfer intellectual capital.

We know that this is the goal of many working on the London ILS project and we suspect that Beale’s quote may be a little out of context. But it’s important to remember that protectionism in a world that is increasingly open risks damaging innovation, and for a nascent market such as ILS this may not be in anyone’s favour.

There are bigger threats coming to traditional insurance and reinsurance markets. Staying ahead of the game, through innovation and leveraging what is unique and successful about a marketplace, is far more critical to market hubs than catching up and trying to retrieve what was never theirs in the first place and to be frank nobody owns.

There are also bigger threats coming to the domicile business model as well, as regulators already sit down to discuss what it will mean when corporate structures are stored in the cloud and which regulatory or tax regime they should follow.

We’re in a rapidly changing world and re/insurance industry. One that will change with increasing speed over the next few years. That means all markets need to work together, to create transparent, functioning risk markets, that foster innovation and grow opportunity.

It is through open and collaborative markets that ILS domiciles stand the greatest chance of succeeding and through collaboration between established centers of risk transfer expertise that the ILS market will gain the opportunity to significantly expand its footprint.

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