Risk & regulatory evolution highlights key role of ILS Directors: Estera

The evolution of the Bermuda domiciled director provides robust governance for the region’s insurance-linked securities (ILS) industry, according to Alison Dyer, Managing Director, Estera.

In light of the ILS sector’s impressive response to the catastrophe events of the past two years, Artemis spoke with Estera’s Dyer about the important role of directors when losses happen, which is always a matter of when and not if.

She explained that as both the nature of the insured risk evolves and the regulatory regime continues to develop, the role of fit and proper persons on the Board of Directors of insurance and ILS structures has become increasingly important.

“In Bermuda, given its long history of innovation and acceptance as a leading jurisdiction and domicile of choice for insurance and ILS, the availability of sophisticated directors is broad. The development of the industry in Bermuda has necessarily fostered competent, commercial executive and independent directors with a broad level of experience, and diversity of backgrounds.

“One of the strengths of the Bermuda value proposition has always been the incredible level of expertise that has evolved,” she said.

As part of the licensing process and also  in the instance of proposed changes to an existing Board, the Bermuda Monetary Authority (BMA) is required to vet any persons that is proposed to fill a Board seat on a licensed insurer.

“That person has to meet, and continue to meet the fit and proper person test promulgated by the relevant legislation. This is an incredibly powerful and necessary control given the complexity of the industry and the need to continue to protect and grow the market in a responsible and efficient manner,” explained Dyer.

Ultimately, both the industry and the regulatory framework in Bermuda demands diversification on boards.

As loss events increasingly hit the ILS space and drive trapped collateral and loss creep issues, coupled with a greater focus on finding more innovative ways to utilise excess capital, Dyer explained to Artemis that it’s of great importance that the right level of general skill is present on the Board.

“But, perhaps even more critically,” she continued, “it is more and more important that the right diversity of skill and industry experience and background is present to assist in governing the entity through the new risks. One might even use this as a move towards the need for professional directors in the industry.”

As an example, Dyer noted the Gator Re Ltd. catastrophe bond transaction, which encountered significant losses from severe thunderstorm activity in the U.S.

“Given the nature of the transaction, there was understandable concern that the matter would become contentious, and there would be challenges around ascertaining the total loss and attachment levels. However, it was shown that this was not the case as the board, with appropriate advisors, efficiently guided the SPI through the loss events that Gator Re Ltd encountered. The direction that was provided clearly would have provided investors with an enhanced level of confidence.”

“Given the large amount of capital at risk, it is natural for investors in catastrophe exposed ILS to become unsettled by the prospect of losses attaching to their investments during potential loss events.”

“However, the evolution of the Bermuda domiciled director, both in terms of regulatory requirements and framework and general skill set, continues to provide robust governance for the industry,” she said.