Targeting ILS in Europe

As the insurance linked securities (ILS) markets continue to grow, competition is becoming fierce between domiciles to become the preferred jurisdiction for these deals. But while Bermuda dominates North American-based deals, Gibraltar eyes an opportunity to grab market share for European deals.

The Financial Services Commission (FSC), Gibraltar’s finance regulator, has issued new ILS guidelines that it hopes will help attract more deals. They deal with the approval process, the fee structure, and the types of transaction that can be based in Gibraltar.

Michael Ashton, senior finance centre executive at Gibraltar Finance, says the rules reflect dialogue with EIOPA and are also designed to factor in Solvency II. “The Gibraltar regulations have transposed the Reinsurance Directive, the principal European Union legislation which sets the standards to be followed for the establishment of special purpose vehicles (SPVs), and are Solvency II-compliant based on the most up-to-date EIOPA technical standards for SPVs,” he says.

Ashton says Gibraltar wants to establish itself as an ILS domicile within the EU, focusing on sponsors and investors structuring deals in Europe.

Guernsey and Ireland have attracted the majority of ILS and other forms of collateralised deals so far but Ashton believes there is appetite within the EU for more choice.

The fact that Gibraltar’s new rules are designed to be compliant with Solvency II will be important, Ashton says, as sponsors will want to be certain they will receive 100 percent credit for a transaction once the risk has been transferred.

Gibraltar has already established a niche for itself in other markets. It estimates that some 16 percent of the UK motor market is ultimately underwritten by companies based there. Ashton hopes the market can ultimately secure a similar level of success in the ILS sector.

“Gibraltar aims to provide a regulatory and commercial environment that will enable ILS transactions to take place in an efficient and effective manner while maintaining robust regulatory oversight. If we can achieve these conditions then I am confident ILS business will come to Gibraltar,” says Ashton.

He also notes the support the jurisdiction is receiving from the ILS sector. The industry has engaged with both the government and the regulator providing valuable feedback on the guidelines.

Without this feedback, the whole process would have taken much longer. “We have had phenomenal support from the working group in providing industry expertise and feedback on various drafts of the ILS guidelines. In my opinion, the time and input that has been provided has been invaluable and will enable Gibraltar to develop its ILS sector more quickly and more effectively thanks to the significant commitment made by the members of the working group,” says Ashton.

An application has also been submitted for a new stock exchange in Gibraltar, which could ultimately list European cat bonds.

He also notes that the expertise is in place to service the ILS sector. He says one of the large insurance managers is investing in the expertise to deal with ILS business supported by a global network of ILS professionals.

An application from an ILS administrator/manager is also being processed with substantial funds under management to form an insurance manager on Gibraltar.

In addition, he notes that all four big accountancy firms have a presence there as do several large local law firms. “I think we’re in a very good position,” he says.

Turning to how the growth of ILS might influence this year’s traditional reinsurance renewals, Ashton anticipates more innovation in this sector.

“Reinsurance renewals experienced downward pressure on pricing in June 2014 in part due to investor appetite for ILS that does not appear to have diminished over the past 12 months, even though pricing has reduced.

“To date the majority of ILS capacity has provided coverage for property catastrophe business but as the ILS market continues to develop, I expect to see more innovation and a broadening of the risk classes that ILS investors will be prepared to insure.”