The first edition of the ILS show, presented by CCR Re in parallel with the quarterly newsletter,ILS News, demonstrated the opportunities offered by Insurance-Linked Securities and the Paris Marketplace.
To review these opportunities, we brought together a panel of recognized specialists: Olivier Desmettre, Brigade Chief at the French Financial Supervisory Authority (ACPR), Benoit Liot, Chief Retrocession Officer at Scor, Edouard Chapellier and Patrice Doat, associates at Linklatlers, Stephan Ruoff, Business Leader at Schroder and Quentin Perrot, Senior Vice President at Willis Securities.
In this third and final article dedicated to the ILS Show, we will discuss the necessity of developing the Paris Marketplace in more detail and ask: What are its strengths and weaknesses? What actions must be undertaken to ensure its optimal position on the ILS market?
How may we enable an ILS fund, like Schroders for example, to orient its customers toward ILS investments located specifically on our marketplace?
Stephan Ruoff: As always, it’s a matter of offer and demand. When more and more ILS are issued out of Paris, they attract more and more attention from investors. What is needed is that the European cedents who recently issued ILS use the Paris Marketplace to “prime the pump” and start generating interest. This applies specifically to Covea, Generali, Unipol, Achmea, without mentioning Scor, a key reinsurer and international player. When CCR Re created its sidecar, this was a great start despite the fact it was more or less a private transaction and lacked visibility on the global ILS investment marketplace. Then again, one must clear the field before setting up much broader transactions!
Quentin Perrot: We should keep in mind that today cedents have a choice between traditional reinsurance and an ILS. But a Cat Bond costs money. A new cedent making an indemnity transaction is obliged to pay a minimum of a million dollars. And this does not include brokerage or restructuring fees that may also incur. The documentation for a Cat Bond is 300 pages long compared to twenty for a reinsurance contract. When a cedent wants to issue a Cat Bond for the first time, the process can take up to several months. The hurdles to overcome when issuing ILS are significant.
So what can be done to enable cedents to access ILS transactions more easily? A number of ingredients are necessary to facilitate the process:
- A responsive and supportive regulator capable of taking initiatives in the early stages of the process;
- A local ecosystem comprised of service providers who are efficient, experienced and willing to help;
- A tax environment that offers reasonable and competitive fee conditions compared to those for traditional reinsurance.
These are the issues that must be addressed to ensure the success of the Paris Marketplace.
Can French tax constraints be considered advantageous when seeking investments that are “ESG-compliant”?
Edouard Chapellier: Over the past few years now, we have seen certain major groups distance themselves from jurisdictions that are perceived as lacking transparency and highly aggressive, including from a tax perspective (money laundering, etc.). A number of companies are seeking to develop a more ethical approach to taxation, which could indeed be beneficial to France.
Seeking diversified sources of capital is very strategic. Brazil is beginning to rethink its definition of an adapted jurisdiction. Singapore has made great strides in this area. What is the position of the French Supervisory Authority? Does the legislator intend to make recommendations that will promote the Paris Marketplace?
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Olivier Desmettre: Securitization provides essential tools that can diversify the sources of financing and spread risks more efficiently. European regulations have provided a general frame for securitization so as to improve the simplicity, transparency and standardization of these tools. The development of securitization tools is vital to the success of the Paris Marketplace and to instilling confidence in investors. It is an important guarantee that is given in addition to having operations that are reviewed and authorized by a supervisory authority like the French Supervisory Authority whose ambition is to be an authority of reference.
Concerning recommendations, it is a too early to respond at this stage. A fairly complete frame for standardization—portions of insurance regulations, notices on risk management published by the Supervisory Authority, etc.—is already in place and enables the creation of securitization mutual fund. The supervisory authority must take time to observe the manner in which the French market is developing before issuing these recommendations.
What are the positive aspects of this specific jurisdiction? Is it intended that these advantages benefit not only French issuers but European players as well?
Benoit Liot: There is no reason that only French issuers benefit from these advantages. Every European issuer is a potential candidate to a jurisdiction located on continental Europe that complies with all the terms of regulatory approval and that offers both optionality and stability.
Quentin Perrot: The long-term trend of the ILS market is extremely favorable. There will be—and there already is—a high demand on the part of cedents in line with the fundamental macro-economic trends. In this context, it is vital that the Paris Marketplace pursues its development. As Benoit indicated, the Paris Marketplace has some very good qualities. What is needed now is to overcome the hurdles that slow its development and, especially, to include the development of other financial products, in addition to certain classes of ILS that have proved their worth, so as to attract more investors. It is important to begin with the French cedents as they are the ones who are more inclined to use the marketplace. Once this works for French operators, the system could be progressively be extended to include other European operators and then those from outside Europe.
Stephan Ruoff: As a Singaporean recently put it, climate change, in addition to other events, will intensify the need for risk transfer. In order to facilitate the transfer of risk, in particular for Southeast Asia, they decided to promote the Singapore marketplace as an ILS marketplace. Risk transfer will no doubt contribute in a positive manner to the economic development of Southeast Asia over the long term.
