New collateralised insurer class to add ILS fund diversification: Demerling, Walkers

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The introduction of a new class of insurer in Bermuda, “Collateralised Insurers”, is expected to be beneficial to both insurance-linked securities (ILS) funds’ and their investors, according to Sarah Demerling, Partner at law firm Walkers.

sarah-demerling-walkersProposed earlier this year via a consultation paper from the Bermuda Monetary Authority (BMA), the provision for the supervision and regulation of the new Collateralised Insurers class came into effect on August 5th, 2019 as part of the Amendment Act 2019, which came into operation and which amends the Insurance Act 1978.

The Amendment Act 2019 makes provision for the supervision and regulation of two new classes of insurers, being “Collateralised Insurers” and “Class IIGB”, and also for the supervision and regulation of “the insurance marketplace provider”, a new category of insurance intermediary.

Over time, the ILS market has expanded to include collateralised reinsurance, which has now become the largest component of the global ILS market. As a result, the BMA has seen the use of its special purpose insurer (SPI) structure, first established in 2009, being stretched to include transactions that had never been foreseen when the SPI was first created.

In response to the increased maturity, sophisitication, and scope of the ILS market and its investor base, the BMA has developed and introduced a new class of limited purpose insurer.

In light of this, Artemis spoke with Walkers’ Bermuda-based Partner, Sarah Demerling about what the introduction of this new class of insurer might mean for both ILS funds and investors.

“The new collateralised insurer provides an intermediate class of limited purpose insurer that goes beyond the traditional SPI, aimed at single cedant use, but it does not fall into the existing commercial regime, it is another example of Bermuda’s licensing regime being applied in a proportionate risk-based manner.

“For ILS funds this provides increased portfolio diversification, further broadening their investible universe while still having the attraction of a relative lack of correlation to financial markets,” said Demerling.

She continued to explain that capital markets investors with a strategic allocation to ILS and an appetite for packaging a wider range of classes, “will now have a more innovative structuring solution and a wider selection of options in which to invest.”

Where SPIs are intended generally for single cedant use, Collateralised Insurers are designed so that they can be used for multi-use transactions for multiple cedants.

Demerling told Artemis that this means that the new Collateralised Insurer class can therefore “expand coverage to risks outside traditional property cat i.e. cyber, marine, or even climate risk.

“Ideally it might be welcomed in structures to address the insurance protection gap,” she added.

The new insurer class differs in a number of ways to a SPI, with documentation revealing that a Collateralised Insurer must have a paid-up share capital of at least $120,000, whereas a SPI requires just $1.00.

Furthermore, it is understood that Collateralised Insurers will be permitted to transact with un-rated non-affiliated cedants, and, provided contractual terms are both clear and certain, the new insurer class will also be able to collateralise potential obligations on each contract to either hard contractual limits or a modelled limit.

The Collateralised Insurer must keep its head office in Bermuda and direct and manage its insurance business in a proportional manner. At the same time, this new class must also appoint a resident principal representative and maintain a principal office in Bermuda.

Discussing Bermuda, and what the new class of insurer brings to the island, Demerling explained: “As we all know, reinsurers need to embrace change and innovation in business models. Creating this new class is not only an example of Bermuda responding to evolving needs in the industry, it demonstrates that Bermuda is looking ahead at the changes that are coming and ensuring that it is well positioned to embrace those changes and to have regulations that remain fit-for-purpose.

“This new class is a complementary and timely addition to the existing ILS offering in Bermuda.”

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