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After a long gestation the Risk Transformation Regulations (2017), passed in November, clear the way for a London-based ILS hub, say Philipp Kusche and Michael Wade of TigerRisk Capital Markets & Advisory.
Over the past decade, insurance-linked securities (ILS) have been for the most part domiciled in Bermuda or the Cayman Islands. The drivers for using these offshore locations were simple: ease of execution, predictable regulation and taxation.
As far back as 2014, many argued that if London created a regime that addressed these same basic issues, the City could become the natural global hub for ILS, collateralised reinsurance contacts and sidecars in particular.
If only it were that simple. Among the missing ingredients in London were the lack of a legal corporate structure similar to that of the class 3 Bermudian reinsurance vehicles which enabled a form of regulated holding company, but which also created protected cells in order to transact risk transfer between counterparties (usually reinsurers to capital markets). Crucial to this structure was the absolute financial independence of each cell, albeit managed by the same entity.
While the cell was operating, there needed to be a zero-tax environment so that assets and liabilities were treated as being gross for as long as the contract remained current. Taxation would become applicable only at the conclusion of the cell activity.
Also missing was a regulatory framework that was of the highest standard, but not such that it arrested its use due to overzealous restrictions or culture.
After a long process of drafting and designing and drafting again, legislation known as the Risk Transformation Regulations (2017), embracing the complete package approved by the UK parliament, ministers, tax authority and regulators, was passed in November 2017.
In broad terms the new ILS framework is similar to that of the Bermudian and Cayman Island structures. Indeed, in some ways there may even be advantages depending upon the type of contract and domicile of counterparties.
First out of the gate was Neon Capital, with its NCM Re vehicle which raised $72 million of capital just before year-end 2017 as a collateralised quota share of its Lloyd’s syndicate 2468 to write property treaty D&F portfolios.
What can we look forward to now the new legislation is in place and contracts are being executed?
To start with, London as an ILS domicile should not be thought of as a ‘raid’ on other jurisdictions, but as a healthy addition to the global hubs of ILS business and trading. It also provides the industry with a mainstream ‘onshore’ location. Moreover, London as an ILS hub may hasten still sceptical investors and risk transfer executors to consider ILS as being permanent and mainstream as well.
classes of business written should broaden in terms of both scale and type.Consequently, classes of business written should broaden in terms of both scale and type. For example, life markets are already a topic of much interest. There is also scope for ‘public’ risks such as US flood and earthquake, not to mention aid to developing countries in the form of catastrophe risk transfer. In other words, governments and major investors can use the UK as an ILS domicile with confidence.
For more standardised structures and risks, the use of London-based ILS will likely depend on the ease of use and overall costs (including tax considerations) in comparison to the other available jurisdictions. We would expect investors also to gain more comfort with London-based ILS structures which could lead to an increase of London-based fund structures and vehicles.
Following the events of 2017, hurricanes and wildfires in the US and earthquakes in Mexico, ILS fund managers have been heavily engaged in raising additional capital to either replenish losses or to grow their funds. We expect this trend to continue which will ultimately benefit London-based ILS structures.
We also have seen a number of new institutional investors show interest in the ILS space following last year’s events. They are partially driven by rate expectations, but they’re also interested in reengaging with the ILS segment given that the non-correlated nature of the asset class continues to be a strong driver for many investors.
TigerRisk Capital Markets & Advisory has teams in New York and London with significant expertise in the ILS market under the leadership of industry veteran Tony Ursano. We’re ready to advise clients and investors on how to navigate the world’s different ILS jurisdictions as well as to help clients establish their own London-based ILS vehicles.
As in every ILS transaction, there are countless elements to carefully consider, ranging from business mix, contractual triggers, choosing the right service providers and which investors to target. To navigate these various decisions, it is vital to engage an experienced advisor.
We know 2018 will be a productive year. The addition of London as an ILS domicile will further energise and grow the global reinsurance market.
Philipp Kusche is a partner at TigerRisk Capital Markets & Advisory and global head of insurance-linked securities (ILS) and capital solutions. He is based at TigerRisk’s New York office and can be contacted at: pkusche@tigerrisk.com
Michael Wade is non-executive chairman of TigerRisk Capital Markets & Advisory (UK). He is based at TigerRisk’s London office and can be contacted at: mwade@tigerrisk.com
TigerRisk Capital, London, ILS, Philipp Kusche, Michael Wade, Bermuda, Cayman Islands, UK
