The gloves are off

Bermuda steals the lead in fight for ILS market dominance

12 January 2014

Leather boxing gloves

Bermuda leads the world in insurance linked securities, having stolen the domicile of choice from close rival The Cayman Islands last year. Its dominance in the sector was highlighted in a report issued last year by the Bermuda Monetary Authority which showed that last year Bermuda overtook Cayman in terms of both value of ILS issuance and number of bonds issued.

In total, $3.5 billion of insurance linked securities were issued by Bermuda-based special purpose insurers in the first three quarters of 2013, it said. That is compared to $1.8 billion issued by the Cayman Islands over the same period. Bermuda also accounted for 62% of global ILS issuance in the third quarter ($1.7 billion). Outstanding insurance linked securities issuance in the country represented more than 40% of worldwide ILS stock, with $8 billion of the $19.5 billion of total global capacity having been sponsored by Bermuda-based special purpose insurers, the report added.

These are impressive statistics, but it was not always so. The Cayman Islands previously led the way, particularly in the catastrophe bond and sidecar markets. By being the first offshore jurisdiction to introduce a legal framework for fully collateralised insurance structures it was able to host the majority of catastrophe bond transactions.

It was not until 2009 that Bermuda began to seriously challenge Cayman’s position with the introduction of its own special purpose insurer legislation. This has been the catalyst to its impressive growth in the ILS market share, from no deals being issued in Bermuda in 2009, to nineteen in 2013, compared to eight deals in Cayman the same year.

The 2009 legislation facilitated the creation of a new class of insurance company known as a special purpose insurer (SPI) that is both cost-efficient and regulated in a way that allows for easy set up and sophisticated insurance transactions. The essential requirement of an SPI is that it is fully funded and, as such, the licence can be used for property/casualty and life transactions. However, the Bermuda Monetary Authority’s definition of fully funded is broad and was developed in consultation with the industry. The funding can be provided with cash or other investments, but also through the use of reinsurance arrangements, swaps, letters of credit or similar instruments. Essentially, the rules governing SPIs make them flexible, cheap and easy to create.

The Cayman Islands of course has not taken the growing strength of Bermuda’s ILS industry lying down. Bermuda premier Paula Cox and Cayman premier McKeeva Bush became involved in an intense war of words over national rivalries in the reinsurance market. In 2012 Bush reportedly argued: "In the mid-Atlantic they say they 'may' reduce some fees; we have reduced fees. They are still talking about their immigration policy and make long statements, but I say this boldly: while Bermuda has been the champion, be assured that we can grow.” Cox immediately hit back by saying that Bermuda was working to extend its lead.

Bush’s assertions that Cayman is fighting back are not mere bravado: in 2012 his government introduced legislation facilitating the creation of two new classes of reinsurer, alongside changes to the country’s immigration policies. The changes bring Cayman legislation in line with international standards and will, according to the Insurance Managers Association of Cayman, lead to substantial growth in the reinsurance sector. What long-term effect all this has on the market remains to be seen, but it has not stopped Bermuda taking the lead. If the insurance linked securities market continues to grow at the pace it has in recent years to become an increasingly large and lucrative part of the financial universe, this could serve to intensify rivalry between Bermuda and Cayman as they vie for dominance in this sector. And this could be good for the industry, as both domiciles compete for ILS company business.

Posted: Monday, January 13th, 2014