Bermuda continues to dominate the insurance-linked securities (ILS) sector despite increased competition from other jurisdictions. The island’s phenomenal growth as the home of ILS relies on its strong reputation and ability to innovate, while the sector has proved its robustness during the events of the past year.
Resiliency and continuity
Bermuda’s ILS sector showed resilience amid the COVID-19 pandemic, which tested the entire global financial sector from March 2020 and is still ongoing. At Apex Group, we were not surprised to see the island maintaining a fully functioning and indeed thriving, (re)insurance ecosystem. Meanwhile, investors and their reinsurance clients benefited from the ILS sector’s well-priced and well-serviced capacity.
We believe the sector’s resilience was ably supported by the advanced business continuity and contingency plans of service providers. The Bermuda Monetary Authority’s efficient approach to issuing licenses during the pandemic was also crucial. Most ILS managers and their administrators, such as Apex Group, were able to conduct business remotely and, as a result, there was significant business conducted during the renewal period.
There have been concerns that the new Lloyd’s of London initiatives to attract ILS business could pull capital flows from Bermuda – but we are confident the Island will continue to be the most attractive and competitive jurisdiction for ILS.
Firstly, the Bermuda Stock Exchange has around $40 billion in market capital outstanding, representing almost 95% of global ILS market share. Secondly, the BMA continues to demonstrate an ongoing commitment to adapt regulation and innovate the market. This was evidenced by last year’s introduction of the ISAC Act for incorporated segregated account company structures and the new Collateralised Insurer, which enables insurers to lead more complex ILS deals such as retroactive legacy covers and structured casualty-ILS. Having worked on the first ISAC structure in a fund context, we believe it remains ideal for ILS purposes and that it demonstrates the jurisdiction’s willingness to innovate.
While there is a chance that London will gain more traction this year, Lloyd’s simply offers a complementary ILS jurisdiction to Bermuda, and recent changes in the UK have grown the size of the pie, rather than eating from Bermuda’s plate.
Likely trends in 2021
As many predict, there will be a ‘flight to quality’ among investors, but we also think there will be a shift to simplicity in the market. Investors will still seek returns, value and diversification, but they will also be selective, which means the ILS sector will need to offer a differentiated capital markets value proposition. As a forward-looking funds administrator, we predict a move towards mono-line business away from broad structures, which will require funds to become more specific to class, peril and geography.
Despite this, there will be practical challenges to establishing new enterprises during the ongoing global pandemic, and we expect Bermudian companies to address these by leveraging existing management, underwriting teams and capital bases, with sidecars offering an attractive option. As such, choosing the right fund administrator that has the expertise and ability to help managers adapt and innovate, will be of upmost importance.
ESG no longer just a buzzword
Sustainable investing and environmental, social and governance (ESG) factors gained phenomenal momentum last year and are clearly no longer perceived as just a ‘fad’. Investors are increasingly requiring ILS funds to take ESG factors into account. The asset class is extremely well aligned with these principles by providing long-term sustainable and attractive returns for capital markets investors. By responding to investors’ increasing ESG needs, the ILS market could also attract additional flows.
To the extent the firms are not already doing so, ESG consideration is another parameter that ILS managers need to consciously and deliberately fold in as part of their investment framework just like they would consider returns or risk parameters. ILS managers can no longer just say they have sustainable funds. They must positively demonstrate alignment of their investment decision-making process, risk management and product disclosures with sustainability goals.
The EU has broken ground with its Sustainable Finance Disclosure Regulations (SFDR) which came into force on March 10, 2021 and ILS fund managers outside the EU will also need to take note. Non-EU firms will need to comply with SFDR if they plan to raise funds from EU investors in future.
ILS fund managers should also be mindful that Level 2 of SFDR is on its way for January 2022 and other regulators are likely to introduce similar rules in the future. At Apex Group we think the introduction of guidelines surrounding ESG-branded ILS portfolios are inevitable. ILS funds in Bermuda should act now to prepare and get ahead of the game.
The Bermuda Stock Exchange is already dedicating ESG as a priority, having launched an initiative in line with the World Federation of Exchanges’ Sustainability Principles. On April 12, 2021, the BMA announced the formation of their subject matter expert team focussing on innovation and climate change. As a jurisdiction, Bermuda must ensure it creates a balance between complying with international standards and creating best practices – without quashing innovation.
