How has the ILS market expanded over the last five years?
The global insurance-linked securities (ILS) market has expanded rapidly over the last five years to become an important element of the global reinsurance and insurance market. The UK government has recognised the size of the opportunity and is now moving quickly to set up a framework that will establish London as a global ILS hub.
What domiciles do you think are leading the way in the ILS market?
There are relatively few places that currently have a framework for ILS in place, including Malta, Guernsey and Gibraltar. However, Bermuda currently dominates the global ILS market, due to a number of factors. One of the main factors is the legislation in place, enabling the setting up of insurance special purpose vehicles (SPVs), which effectively reduce the capital requirements on ILS deals and cut administrative costs, and form a critical part of the ILS arrangement. Bermuda also benefits from significant reinsurance expertise and a very credible track record within the reinsurance and insurance industry that sets it above many of the other jurisdictions with ILS frameworks in place.
Another important factor is speed of response. The regulator in Bermuda can move quickly to authorise SPVs, often within a matter of days. In addition, the existence of a secondary trading platform in Bermuda is crucial in facilitating investment in ILS securities.
Malta recently implemented reinsurance SPV legislation for ILS transactions. Do you think this trend will follow in other domiciles?
Absolutely. Having SPV legislation in place is a prerequisite for any jurisdiction looking to establish a market for ILS transactions and other domiciles will follow Malta.
One market that has to this point remained subdued but offers significant potential for ILS is Asia. With a high exposure to natural catastrophe events that generate ever-higher economic losses, the region should be attractive market to investors in ILS seeking diversification.
Having the right legislation in place is vital to create the conditions for the ILS sector to flourish in Asia and it will also be necessary to address other hurdles to its development, such as the low level of insurance penetration in the region and limited exposure data.
January 2017 will see the introduction of ILS legislation in the UK. How do you think the market will take off?
We expect to see draft ILS legislation in the UK early in the new year, but even then it will still take some time for it to be passed into law. However, once the framework is in place and the ILS starting gun is fired, it is reasonable to expect the market to take off quickly.
London is the world’s preeminent insurance centre at the forefront of innovation and populated by some of the industry’s best and brightest people.
Do you see London becoming a hub for ILS? And what would it need to do to achieve this?
London certainly has the ability to become a hub for ILS. The UK government has made it clear that it is keen to attract ILS business to the UK and its proposed legislation has been drafted with the aim of overcoming three main obstacles that stand in the way.
First, the UK currently lacks the corporate structures most efficient for setting up insurance SPVs, which will form a critical part of the ILS arrangement.
Next, the UK tax regime needs to be made more attractive to international ILS investors.
This means designing a tax treatment similar to that provided in other competing jurisdictions, ie, no or minimal tax within the insurance SPV, with tax payable by investors in the jurisdictions where they are located on their share of the vehicle’s income.Finally, speed to market will undoubtedly be a key component of London’s ILS proposition and one that must be fulfilled if London is to become an ILS hub—the ability to set up a new ILS vehicle in a timescale that will make the UK competitive with other domiciles will be vital.
In the case of a relatively standard ILS transaction, a period of six to eight weeks from submission of a formal application is envisaged for authorisation of an SPV. However, it remains to be seen in practice whether this will be achieved and, in any event, how competitive this will be compared to other domiciles, in particular given that they will surely react to speed up and streamline their own processes further.