The world’s biggest hub for commercial and specialty risk is angling for a much more prominent role in the $140 billion global market for insurance-linked securities.
Issuance of ILS products, currently dominated by Bermuda, is witnessing a stunning surge in g
rowth as primary insurers and reinsurers look for ways to transfer their risk to the capital markets. And thanks to rising temperatures, urbanization and inflation, insurers increasingly face natural catastrophe costs that are well above historical norms.
London’s dominance in insurance-market infrastructure makes it an obvious destination for issuers of catastrophe bonds and other ILS products, says Caroline Wagstaff, chief executive of the London Market Group, whose membe
rs include insurers operating in the world’s biggest marketplace for complex insurance risks, Lloyd’s of London.
“It just feels a little illogical that we’ve got all this ILS expertise sitting in London and they all go to Bermuda,” she said in an interview. “Shouldn’t we be keeping this activity within the London market?”
The comments follow concrete steps by the UK to expand its ILS footprint. Earlier this year, the UK government unveiled reforms that would allow London to take a bigger share of the ILS market, in part by making existing
rules such as those covering insurance special purpose vehicles more flexible. The goal is t
o make the UK the “location of choice” for ILS issuers, rather than having such transactions be conducted offshore, according to law firm Clifford Chance.
Against that backdrop, the Bank of England, via its regulatory arm, plans to streamline and speed up applications and approvals for financial vehicles used to
issue catastrophe bonds. Wagstaff says the success of a cat bond issued by Flood Re, Britain’s flood insurer of last resort, underpins the potential to do more.
Flood Re’s £140 million ($187 million) cat bond was issued via London Bridge 2 PCC, giving investors access to risks underwritten in the Lloyd’s market.
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Flood Re says it’s looking to do more such issuance, in part as insurers in the country buckle under the weight of flood-related claims. And the Bank of England’s regulatory arm is currently exploring a faster pathway to approve certain catastrophe bond applications, as well as a 10-day target to green-light certain ILS arrangements.
For now, though, most issuers of cat bonds are still choosing Bermuda. The Caribbean island’s stock exchange is where more than 90% of global ILS listings take place, bringing with it several layers of fee-generating services for accountants, bankers, lawyers, and risk experts.
Greg Wojciechowski, president and CEO of the Bermuda Stock Exchange, cautions against underestimating the barriers to entry.
“The ecosystem has developed over many, many years, and it simply can’t be replicated overnight,” he said in an interview.
Most of the risk covered by the cat bonds issued in Bermuda, meanwhile, is centered around the US hurricane season. For that reason, investors argue that the US should be trying much harder to take control of the financial infrastructure around issuance.
“The traditional reinsurance market in the US is already at capacity when it comes to peak-peril risks,” said Joanna Syroka, director of new markets at the world’s biggest cat bond hedge-fund manager, Fermat Capital Management. “Bringing cat-bond issuance onshore is the natural step to addressing that problem.”
Syroka said that locally issued cat bonds would also help attract fresh inflows into ILS, as some investors are wary of allocating funds to offshore vehicles.
