London wants a much bigger chunk of catastrophe bond market

Gautam Naik / Bloomberg

Jul 08

The world's biggest hub for commercial and specialty risk is angling for a much more prominent role in the US$140 billion global market for insurance-linked securities.(July 8): The world's biggest ...

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And thanks to rising temperatures, urbanisation and inflation, insurers increasingly face natural catastrophe costs that are well above historical norms.\nLondon'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 members include insurers operating in the world's biggest marketplace for complex insurance risks, Lloyd's of London.\n\"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?\"\nThe 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 to make the UK the \"location of choice\" for ILS issuers, rather than having such transactions be conducted offshore, according to law firm Clifford Chance.\nAgainst 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. \nFlood Re's £140 million (US$187 million or $241.76 million) cat bond was issued via London Bridge 2 PCC, giving investors access to risks underwritten in the Lloyd's market. \nFlood 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.\nFor 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. \nGreg Wojciechowski, president and CEO of the Bermuda Stock Exchange, cautions against underestimating the barriers to entry.\n\"The ecosystem has developed over many, many years, and it simply can't be replicated overnight,\" he said in an interview. \nMost of the risk covered by the cat bonds issued in Bermuda, meanwhile, is centred 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.\n\"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.\"\nSyroka 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.\nIn the US, there's proposed legislation to alter the tax code and eliminate an expensive \"double taxation\" hit that deters insurers from issuing ILS securities domestically. But for now, that remains a distant possibility. For example, the National Flood Insurance Program under the Federal Emergency Management Agency has tended to do its issuance via a special purpose vehicle that's based in Bermuda.\nJohn Seo, co-founder and managing director of Fermat, says the US market needs more investment firms like his, which oversees around US$10 billion from its head office in Connecticut. \"And you can only get that if you bring it onshore,\" Seo said during a recent webinar.\nWhile Fermat waits for the US government to support local ILS issuance, other jurisdictions are making their move. In Asia, where issuance of ILS products has historically lagged behind levels in both the US and Europe, efforts are now underway to create a local market.\nAsia's ILS ambitions\nSingapore and Hong Kong subsidise local cat bond issuance with grant programmes. They're now exploring the feasibility of setting up Protected Cell Companies to make their domiciles more attractive for cat bond issuers. (Each cell within a PCC represents a legally distinct portfolio of risk, and can therefore support its own ILS issuance.)\nCurrently in Asia, only 13% of natural disaster losses are covered by insurance compared to a global average of 37%, according to Samuel Gan, head of debt capital markets, global sales and origination at the Singapore Exchange. He says that while cat bonds are \"exotic, unfamiliar, and outside the mandate\" for many Asian investment firms, new regulatory incentives are tempting more issuers and investors to set up shop there.\n\"We have a well-informed investor base on the institutional, private-wealth and family-office side,\" said Gan. \"That makes the conversation more compelling. And the PCC structure currently under consideration would allow \"overheads like legal and audit fees to be spread over multiple transactions, making it easier and more cost efficient to issue cat bonds\", he said.\nThe Singapore Exchange recently listed the Asian Development Bank's first-ever catastrophe bonds, which shield Kyrgyzstan and Tajikistan against natural disasters. And the World Bank chose Singapore for a US$200 million cat bond for Jamaica hurricanes. \nBoth deals took advantage of a programme that subsidises 70% of the upfront cost of cat-bond issuance for risks originating in the Asia-Pacific region, and up to 50% for risks originating elsewhere, each capped at US$1 million. \nAsia's eagerness to create its own issuance hubs is underpinned by the fact that the region is the most exposed to natural disasters. Catastrophe losses reached US$73 billion last year, well above the 10-year average of US$66 billion, according to Munich Re. Only US$9 billion of those losses were insured.\n\"We have seen the good track record that ILS has demonstrated globally,\" said a spokesperson for the Hong Kong Insurance Authority. By providing incentives to attract more ILS issuance and investment, \"we can build a platform to solve our problem\".\nUploaded by Chng Shear Lane","kind":"highlight","is_publish_news":true,"is_publish_highlight":false,"is_publish_live":false,"is_publish_wemedia":false,"editions":null,"column":"","sentiment":"0","news_tag":"","news_rank":0,"isVideo":false,"video":null,"symbols":[],"gpt_button":0,"need_auth":false,"need_login_tip":false,"code":"91000000","status":"200"}}}