The U.K. is hoping to become a global center for the issuance of insurance-linked securities after it exits the EU, but London has a long way to go before it can compete with rivals like Bermuda, Guernsey and the Cayman Islands.
Lawmakers could soon find themselves voting on a bill drawn up by the Treasury, in collaboration with British insurers, aimed at creating rules that would allow for the issuance of ILS, bonds backed by insured perils such as natural catastrophes. The Treasury is proposing to remove key obstacles to their issuance, including by rendering them exempt, in line with other ILS-issuing jurisdictions such as Bermuda, from corporation tax.
But critics say the proposals fail to deal with a key problem: very long lead times, the periods regulators would give themselves to approve issuance applications.
"The proposed timeframe of six to eight weeks for determination of simple applications, with a back-stop of six months, is outside the upper bounds of the timescales adopted by other jurisdictions, and as such is unlikely to be competitive," Willkie, a law firm, wrote in a critique of the new rules.
The proposals' shortcomings could mean London will struggle to compete for a significant chunk of the $75.1 billion market with the likes of Bermuda, which allows post-transaction notification of the regulator.
"I struggle to see how London can ever be as cost-efficient or as quick for investors and cedents looking to establish ILS structures," Steve Evans, the founder of ILS-focused information hub Artemis.bm, said in an interview. "That may not always be an issue, and certainly London would attract some ILS business. But would it be enough to move the needle for the local reinsurance market?"
'Life' and 'nonlife'
ILS allow capital market investors to back insurance risk directly, without going through an insurer or reinsurer. The bulk of the market today is focused on U.S. perils, paying out in the event of hurricanes hitting Florida or earthquakes hitting California, for example. London does not have rules that allow for the issuance of these securities.
The vast majority of ILS back easy-to-model "nonlife" perils like natural catastrophe damage to property, or so-called cat bonds. Other perils such as the risk of people living for a longer or shorter time than expected — a concern for life insurers — are difficult to place in the ILS market and are typically only served by the largest reinsurers like Munich Re, Swiss Re Ltd., Hannover Re and SCOR SE.
But experts say it is precisely in the expanding life ILS space that London could find a niche, as the depth of the underwriting expertise in the British capital makes it uniquely positioned to bring to market new and unusual products. Today, life insurance-related risks only make up 6.2% of outstanding ILS risks by total value, according to Artemis.bm. Some hard-to-model nonlife perils like cyber or terrorism risk could also more easily be issued in London, James Slaughter, director of global reinsurance strategy at Liberty Mutual Group Inc., said at a talk at the Lloyd's of London marketplace.
"I think what London and Lloyd's should do is innovate, in broad terms, in the products space," Slaughter said. "If you can create a framework in which investors and cedents can come together and create a product, then I think you've got a compelling reason for companies like Liberty Mutual to come to London to engage in those transactions."
People travel in elevators on the exterior of the Lloyd's of London building in the City of London.
Source: Associated Press
Greg Wojciechowski, the CEO of the Bermuda Stock Exchange, told S&P Global Market Intelligence that London's depth of expertise could create new opportunities for ILS more generally.
"There might be a different angle of thinking that emerges from London and leverages a London experience," he said. "Who knows, down the road, if there isn't a way, through some type of collaboration that there is the ability to continue to work together for the acceleration of this segment of the industry as well as the asset class?"
Des Potter, the managing director of GC Securities, helped the Treasury draft the bill that is expected to be presented to Parliament later in 2017. He said during the panel session at Lloyd's that the plan "is not about competing with Bermuda. It's about using the skills and capabilities of the London market to see where else we can transfer risk into the capital markets, which have tremendous … appetite [for ILS]."
Plans for legislative changes to make Britain an ILS-friendly jurisdiction date from 2015, but a looming exit from the EU could give the initiative a new impetus, at a time when the country wishes to be seen as an appealing place in which to do business.
A general election June 8 stripped Prime Minister Theresa May's Conservative Party of its majority in the House of Commons, complicating the Brexit process, and a number of insurance firms — as well as the Lloyd's marketplace itself — have said they will set up EU bases in other countries.
But Artemis.bm's Evans said there is no reason to think that ILS issuance would be affected by changes in legislation or regulation post-Brexit.
Willis Towers Watson Securities is part of Willis Towers Watson Plc. GC Securities is the investment bank of broker Guy Carpenter & Co. LLC, a subsidiary of Marsh & McLennan Cos. Inc.