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September 2012 Bermuda Re/insurance
Bermuda ILS
Cannibalism or evolution?
Bermuda Re/insurance
Insurance-linked securities (ILS) are grabbing increasing levels of market share, particularly in the cat space. Investor interest has evidently been piqued of late, while insurers have shown themselves increasingly keen to explore their alternatives. Here, the potential of ILS is explored.
ermuda is very much at the forefront in the development of insurance-linked securities (ILS), with a host of Island players active in the space. From a running start back in 2008–2009, when new special purpose insurer legislation was implemented by the Bermuda Monetary Authority, Bermuda has established a leading position within the ILS market. As Arthur Wightman, partner and insurance leader at PwC, Bermuda indicated “it is hard to dispute Bermuda’s pre-eminent role in ILS—with innovative and well-established reinsurance and investment marketplaces, as well as a practical regulator and stock exchange, service providers and most important, the intellectual excellence it is so well regarded for—capital flows have come en masse through Bermuda recently and look set to continue.”
B
And 2012 has been another bumper year for ILS. Issuance and debate regarding its potential as an increasingly significant complement to the traditional reinsurance market has been riding high. A host of Bermuda and global players are involved in the space and despite suggestions of a competitive dynamic, there seems a grudging acceptance that alternative plays and the involvement of
the capital markets are here to stay. Issuance and interest has been on a general upward trend for some time, but interest has risen markedly of late, driven by a number of factors.
Wightman described the sector as a “hive of activity recently”,
with rising investor interest in the space and the hunt for diversification in risk transfer being the main drivers of rising issuance. Wightman said that the ability to enter and leave the market quickly and with relative ease, compared favourably to more traditional reinsurance investment, attracting capital players keen to invest in short-term plays. He said interest had risen as asset managers have sought uncorrelated risks in the face of the wider economic downturn, with ILS an attractive admix to traditional capital market portfolios. Returns on ILS products are also seen as attractive at present—particularly considering low yields in the wider market—he said, but warned that these are nevertheless “risk-rated returns”.
Wightman added that on the sponsor side, “risk managers are always looking at better ways to diversify the risks they
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