ILS
Cautious optimism: how ILS Bermuda sees its future
On the eve of its 2022 conference and networking event Convergence, we asked ILS Bermuda chair Jo Stanton and vice chair Hanni Ali to describe ILS Bermuda’s 10th year.
“Capacity will be in high demand and will likely drive material movements in pricing.”
Jo Stanton, ILS Bermuda
What is your role and the scope of ILS Bermuda?
As chair and deputy chair of ILS Bermuda, we work with a dynamic and experienced team of industry professionals to promote, grow and enhance Bermuda’s insurance-linked securities (ILS) market.
Innovation, industry leadership and a bold approach to new financial products have made Bermuda a leading jurisdiction for reinsurance, capital markets and ILS. The Island enables capital and risk solutions to protect the world's population from catastrophic events, climate change, and other environmental and social threats.
ILS Bermuda was formed in 2012 by a group of volunteers and has worked towards several goals: promoting Bermuda as the jurisdiction of choice for the development of insurance-linked solutions; working with regulators, trade groups, government organisations and industry partners to enhance and deliver our combined intellectual capital and sophisticated re/insurance solutions to the global market; attracting new sources of risk to match with capital and grow the market and providing education and opportunities to young Bermudians in the ILS industry, including facilitation and partial funding of internship opportunities located in Bermuda.
We are both active on the Thought Leadership Committee of ILS Bermuda, planning the annual Convergence event agenda and supporting the Education Committee in their engagement on internship opportunities as well as student engagement.
Bermuda is the leading jurisdiction for cat bond issuance and the majority of the collateralised retrocessional and reinsurance capacity is managed from Bermuda. The Bermuda Stock Exchange (BSX) lists more than 90 percent of total global ILS issuance. The market is certainly maturing—we used to talk about the convergence of capital markets and the risk industry. But now investors understand the asset class and have become a stable and embedded part of the reinsurance industry.
Bermuda benefits when there’s dislocation, when the market hardens and when there are gaps in coverage. The Island has, over many years, built a strong infrastructure, with a depth of talent and experience that is innovative and creative in solving client problems and finding capital. Speed to market and efficiency in putting capital to work are hallmarks of the Bermuda market.
What is the current state of Bermuda’s ILS sector?
What are the market conditions you’re seeing?
The market is about to experience a major imbalance with demand expected to materially outpace supply in the rapidly approaching January 2023 renewals. The January 1 renewal season will be telling.
Post Hurricane Ian and after several years of high cat losses in the US, Europe, Japan, Australia and elsewhere, there will be large amounts of lost capital and material trapped capital. This dynamic will be across both the private ILS market and the 144A cat bond segment.
Reinsurers are all suffering from reduced capital bases due to mark-to-market reductions in fixed income portfolios coupled with losses from Russia’s invasion of Ukraine and now a major industry loss in the shape of Hurricane Ian.
Capacity will be in high demand and will likely drive material movements in pricing, particularly for low layers for both retro and reinsurance, and we expect minimum rate on-line charges will likely increase given the increase in the risk-free rate of return.
“Pricing has increased partly because the view of risk has changed.”
Hanni Ali, ILS Bermuda
The scope of risks is certainly growing and diversifying—for example, clients are increasingly expressing interest in cyber and specialty risks as well as casualty. We are also seeing interest from investors in environmental, social and corporate governance business, including renewables and facilitating the construction of wind and solar installations.
With respect to innovation in the reinsurance space, the market is doing a good job as can be seen through new products, vehicles and structures to address new and evolving risks. We have seen newer entrants demonstrate how we can leverage artificial intelligence to interpret data. It is important that we continue to invest in innovation and there is a lot of exciting innovation taking place and a greater appetite among ILS investors to look at new and different risks as the view of risk continues to evolve.
Is there interest in new risks or other forms of innovation?
How will the sector develop in the next few years?
Terms and conditions will continue to tighten with contract certainty and more explicit definitions of coverage becoming much more widespread.
Trapped capital remains problematic and we need to find better ways of dealing with this issue, such as moves to securitise trapped capital. The legacy market may also become increasingly important in alleviating this and other issues such as tail risk within the ILS market.
Climate risk will undoubtedly become an increasingly pressing issue and some vulnerable areas may become uninsurable. The Bermuda Business Development Agency is also driving the development of Bermuda as the climate risk capital of the world and there has been a noticeable increase in climate-related insurers and new dedicated ILS funds. Bermuda has led the way in addressing the protection gap through various tools, for example weather-related parametric coverage for agriculture companies.
Florida has been challenging concerning issues on property cat. And while there have been positive legislative changes, further changes are needed to ensure insurers and reinsurers can continue to participate in this market. Certainly, Hurricane Ian has shown the extent of damage that can be done when powerful storms hit populated areas.
While Bermuda is the undisputed market leader, complacency becomes a risk—as the saying goes, “pride cometh before a fall”. Other financial services jurisdictions such as Singapore and London have passed ILS regulations to compete with Bermuda but many of those bonds are listed on the BSX.
Bermuda must continue to innovate and adapt and implement technological solutions in all aspects of the market. The reinsurance market is certainly innovating through new products and structures. Increased market volatility and losses over the last few years have also increased pressure on raising new capital. It’s important that the Bermuda market demonstrates pricing discipline in an inflationary climate as well as address climate change and unmodelled risks.
Pricing has increased partly because the view of risk has changed but the required return on capital has also changed. The cat market is competing with volatility and returns of other markets and needs to demonstrate attractive returns and diversification to attract new capital.
It is also critical for the industry to message early and often on any planned changes to regulation, legal, immigration and tax frameworks. It’s also imperative to lower costs and other friction associated with operating from Bermuda.
How can Bermuda remain the world leader?
Any other thoughts or messages?
This is a hard market, Bermuda can and should lead as it has before in 1992, 2001 and 2005.
The type of capital that will be participating will be different from past cycles, regulators need to appreciate that and enable businesses to flourish.
Our team is looking forward to hosting the Bermuda Convergence event, and celebrating 10 years of bringing the industry leaders together.
Convergence sets itself apart from most traditional conferences, bringing together key players in the ILS sector for networking and education sessions, all within an exclusive business setting. This unique networking event allows its guests an unmatched opportunity to access the alternative risk transfer marketplace, unveiling the potential of ILS and unlocking the value of the ILS asset class.
Image Credit; Shutterstock.com / Black_Kira
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