The development of Insurance Linked Securities (ILS) represents a competitive challenge for financial marketplaces
To meet this challenge, it is essential to provide sponsors as well as investors with adequate access to local service companies—in addition to a regulatory framework—to ensure the success of their issuances but also to monitor and manage operations over time. What is required, therefore, is a microcosm of skills combined with a diversity of players. This is one of Bermuda's strong points.
However, Hong Kong possesses another vital asset, access to the Chinese market, with its potential in terms of both sponsors and investors. Admittedly, the opportunities are enormous. On the other hand, the political situation of this former British colony has become increasingly complicated since the recent events that shook the city. The question one can legitimately ask is what will the impact of political instability have on the attractiveness of this financial marketplace over the long term?
In any event, Asia's potential on the ILS market is tangible. Both Hong Kong and Singapore understand this.
The emergence of new jurisdictions, as seen in Europe with London and Paris as well as more recently in Latin America with Brazil, holds the opportunity of generating optionality to the benefit of the sponsors. In the end, this is the most important aspect. The objective here is not to present an opportunistic approach that entails scraping together insignificant gains on structuring thanks to subsidies provided by one or the other authorities. Much greater benefit is to be had since, if they achieve their ambitions, the plurality of choice offered by these marketplaces will increase the agility of sponsors and enable them to gain easier access to the capital markets.
However, attracting sponsors to these new jurisdictions is not a simple feat and efforts in this direction must be accompanied by those of the investors. To achieve this, the jurisdictions must demonstrate the pertinence of their major strengths, underscore their competitive advantages and become more attractive.
The Paris Marketplace, for example, enjoys the benefit of a statutory scheme that has been in place since 1988 and has proven its success since that time through the securitization of bank debt. It has a regulatory body that is recognized for its expertise, a framework that is Solvency II compliant and an extensive pool of prominent domestic sponsors. It does however have its share of challenges to be met as is the case for every new entrant. Dublin has made its place on the market. Let us hope that others will achieve the same success. This would certainly be of benefit to the development of ILS.
It will also be required that we understand and master the advantages and disadvantages of an increasing number of jurisdictions. The cedents and their advisors will surely enjoy comparing the different options and assessing whether they comply with their objectives. This will no doubt encourage innovation.
Industry can only welcome these newfound initiatives.
ILS; still an attractive asset class
The January renewal season was expected to be tense particularly for the retrocession market. There were good reasons for this, namely the unknown impact of the Covid-19 crisis, high Cat losses and portions of collateral that were held captive sometimes at significant levels. In short, the environment was favorable not to a hardening of the market but to a hard market.
In the end, and without a splash, the expected monumental upturn in conditions did not materialize. Assuredly, some increases in rates as well as firmer conditions for certain clauses or exclusions were recorded. A number of new players, looking to seize opportunities at the time of the renewals, raised significant capital in anticipation of an upturn in the cycle, in particular with respect to retrocession. The ILS market also saw certain funds raise several hundreds of millions of euros for deployment on January 1, in anticipation of increased rates and harder conditions. Proof that, despite all, interest in this asset class remains real.
However, the most striking thing about the renewals was the capacity of certain funds to return the capital they raised when they were not in a position to deploy it correctly. This provides the proof needed by investors that the industry is capable of complying with underwriting discipline and adhering to it over time.