FOREWORD: ILS BERMUDA

BERMUDA EYES NEW HIGHS FOR ILS

As Bermuda positions itself to become a global leader in climate risk finance solutions, the ILS sector’s potential on the Island could be more than anyone ever imagined, writes Jo Stanton, chair of ILS Bermuda.

“Fund managers continue to look at alternative asset classes that can generate alpha.”
Jo Stanton, ILS Bermuda

Capital markets and the insurance and reinsurance industries have had a long-standing and mutually beneficial relationship. Bermuda is the global centre of reinsurance expertise and a market leader in the alternative investment fund industry.

As a result of these attractive features, along with a solid regulatory framework, Bermuda has emerged as the natural jurisdiction for the convergence of capital markets and re/insurance.

Bermuda’s insurers and reinsurers have for decades been partners to the vital global insurance industry, providing innovative solutions to the markets they serve in all the world’s major economies. Bermuda has critical mass and depth of experience in respect of sponsors, managers, underwriters and brokers as well as providing confidence and security to clients and investors utilising Bermuda products.

Insurance-linked securities (ILS) have emerged as a popular asset class for several reasons, but mostly due to the investment risk-adjusted returns being uncorrelated to traditional financial markets. For example, over the last 10-plus years, catastrophe bonds have proved to be less volatile than stocks, corporate and high yield bonds and have produced attractive returns with less volatility.

As and when the traditional financial markets show signs of fragility and volatility, fund managers continue to look at alternative asset classes that can generate alpha and attract investors looking for stable returns that are generally uncorrelated to the traditional financial markets. Even with the more recent macroeconomic headwinds seen in the financial markets, the ILS market has persevered.

“While not without its challenges, the second quarter of 2022 was the third-highest quarter on record for cat bond issuance.”

Other jurisdictions are keen to emulate our success, but it is clear that Bermuda is far out in front in terms of ILS transaction volume and expertise, thanks to our many competitive advantages such as speed to market, expertise in property-catastrophe risk and catastrophe modelling, actuarial analysis and underwriting, first-class regulatory regime, infrastructure, technology, an internationally recognised stock exchange, as well as Solvency II equivalence EU and recognition by the US NAIC.

As evidence of Bermuda’s standing in the market and the value it provides, Bermuda supported a new wave of capital estimated at approximately $15 billion in 2020, boosted by a hard market in insurance and reinsurance. Capital flowed to existing and new companies along with various ILS structures. As the market evolves and conditions change, Bermuda’s understanding and ability to respond fortifies its position as the World’s Risk Capital.

The Bermuda Stock Exchange (BSX) is the world’s leading exchange for ILS. In 2021, ILS listings reached a new record high, with a 25.4 percent increase from the total in 2020. While not without its challenges, the second quarter of 2022 was the third-highest quarter on record for cat bond issuance, demonstrating the continued success of the asset class. This leading position and growth look set to continue for the foreseeable future.

Regulation has constantly been updated and enhanced over the years as the ILS sector has evolved to meet the commercial needs of the market and clients while providing a well-balanced, thoughtful regulatory approach which is proportionate and risk based.

Bermuda’s regulator, the Bermuda Monetary Authority (BMA), works collaboratively with industry to ensure legislation is updated to provide sophistication, flexibility and speed to market. For example, the BMA recently implemented a faster catastrophe bond issuance vehicle registration process with approval in three days, compared to a minimum of two weeks and up to two months in other jurisdictions.

Bermuda is set to continue to play a central role in this area.”

Climate solutions

Bermuda is positioning itself to become a global leader in climate risk finance solutions and addressing the estimated $1.2 trillion global protection gap—those corporate entities, municipalities, countries and individuals that are uninsured or under-insured. With the Island’s long history of providing catastrophic peril coverage through innovations such as ILS, Bermuda is set to continue to play a central role in this area.

Investors are becoming increasingly focused on directing capital to environmental, social, and corporate governance (ESG)-compliant entities and are asking insurers, asset managers and service providers about their ESG principles. ILS structures can certainly fulfil ESG considerations—something that has been recognised by investors such as pension funds around the world.

Goal 11 of the United Nations Sustainable Development Goals (SDG No. 11) is to “Make cities and human settlements inclusive, safe, resilient and sustainable”. One of the specifics of SDG No. 11 is to “substantially increase the number of cities and human settlements adopting and implementing integrated policies and plans towards inclusion, resource efficiency, mitigation and adaptation to climate change, resilience to disasters, and develop and implement holistic disaster risk management at all levels”.

ILS Bermuda, comprising entirely industry executives working together on a volunteer basis, was created with the idea of anchoring and promoting Bermuda as the centre of excellence for the creation and listing of ILS structures.

ILS Bermuda hosts Convergence, an exclusive annual event in Bermuda, bringing together investors and key players from the ILS sector for networking and education sessions. The event is supported by the Bermuda Business Development Agency, as well as overseas and local corporate sponsors.

ILS Bermuda partners with the Bermuda College to provide education and work experience opportunities in ILS for Bermuda’s future business leaders.

With its talented pool of professionals, strong, yet flexible regulatory environment, and overall reputation as being the market leader in this space, it is anticipated that Bermuda will continue to be considered the top jurisdiction for ILS and provide innovative products and solutions for alternative risk transfer for years to come.

To find out more visit ilsbermuda.com/

Image courtesy of Shutterstock / BradleySpence