The impending release of new insurance-linked securities (ILS) legislation by the UK government could help the London insurance and reinsurance market take on a more active role in creating products to support resilience in developing markets, according to the LMG’s CEO.
The UK government’s Treasury has been working on legislation to enable the UK to become a home for the issuance of insurance-linked securities (ILS), such as catastrophe bonds, collateralised reinsurance transformers and other ILS vehicles, for almost 18 months.
As the release of the final legislation grows nearer, thoughts are turning towards what this new-found ILS issuance ability will mean for the London insurance and reinsurance market, particularly as the market continues to seek to modernise and innovate.
According to Benedict Reid, Chief Executive Officer of the London Market Group (LMG), the impending ILS rules are set to help the London re/insurance market innovate in narrowing the protection gap and addressing developing market natural disaster risks.
Speaking at the Verisk Symposium in London this morning, Reid explained; “An important area that we’re starting to think through is the role of the market in supporting resilience for developing markets, resilience in terms of natural catastrophes, resilience in terms of under-insurance.
“We’re starting to think about how the new insurance-linked securities (ILS) legislation, that’s coming in, in the UK this year, can help the London market take a more active role in some quite specific, special products to support resilience.”
This is positive news. It continues to heighten the expectation that the London market will look to its ILS rules to innovate, create new product opportunities and find new ways to leverage the depth of the capital markets to incrementally underwrite new risks.
Which is exactly what this legislation should be seeking to promote, a regulatory environment that can help the traditional London insurance and reinsurance market participants to generate new business, develop new product opportunities and importantly lower the cost of risk capital in order to allow the expertise if the London re/insurance market to be put to good use in developing regions.
Consider the potential for the ILS legislation transformer proposal to be put to work alongside other initiatives, such as perhaps the work undertaken by Lloyd’s of London, Guy Carpenter and the UK’s Met Office to create a weather index for Asia.
Or Global Parametrics, the start-up we wrote about yesterday here which is set for launch with backing and an ambition to leverage third-party ILS capital partners. Global Parametrics could also leverage the UK’s ILS transformer legislation within its business structure in the future, channeling more capital markets money to cover disaster risks in the developing world.
These UK grown initiatives, and others like them, could help to bring efficient, capital markets financing through ILS vehicles based in London into the fight to increase resilience and narrow the insurance protection gap, or to increase insurance penetration.
The LMG’s focus on this opportunity is clearly positive for London and could help the market to position itself as a leading innovator in reducing the cost and raising the efficiency of risk capital, in order to make it useful in the developing world.
Reid went on to confirm the timeline expectations for the new UK ILS legislation to be introduced, saying; “We’ve got every hope that it will become law this year and actually, on a serious note, we’ve had a huge amount of support from the government to make ILS a reality in the UK.”
The legislation will create an environment in which the London market and other re/insurers will be “able to issue ILS products in the UK, with an appropriate tax and regulatory regime surrounding it,” Reid said, adding that at the LMG, “We’re really excited about it.”
For the London market the ILS legislation is an opportunity for innovation, problem solving and an efficiency generator, which in the current market environment where rates have been softening and investment returns dwindling, is positive for all insurance and reinsurance market participants.
Of course it also means a second balance sheet becomes more readily available for London re/insurance market players, as they will be able to tap into the depths of the capital market and ILS investors from within the UK.
“It means the ability to issue new products for new capital, which is a good thing. It’s exactly what the LMG should be promoting, new products for new capital,” Reid enthused.
The final draft of the UK’s ILS legislation is expected within the next couple of months, Reid said, suggesting that the final enactment of any ILS related inclusion in financial services legislation could happen in 2016.
So we really could see ILS transacted in London by January 2017, which would be a great boost for the market. Even better if it is resilience related and provides London an important position in the growing mission to provide disaster risk capital and narrow the protection gap.
Read some of our other recent coverage of London’s journey to become an ILS hub: