‘The time limits for ILS regulatory approval in the UK are not competitive enough’

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Clive O’Connell, partner and head of insurance and reinsurance at City law rm McCarthy Denning, talks to Insurance Day about the rating outlook, London’s efforts to create an insurance-linked securities hub and the latest developments in the global ILS sector.

Q: What are the lessons of the recent catastrophe loss events for the ILS sector?

A: “The recent events show ILS investors the need to diversify their investment within the ILS sphere. This should lead to investors looking for a wider range of investment opportunities through which to hedge their risks. At the same time, the fact insurers and re insurers came through the events without any immediate failures or imperilments points to how ILS, as part of an overall protection strategy, can help insurers and reinsurers in the face of major perils.

“The result should be an increase in the risks being protected against and a diversication of risk away from over-specialisation in the Gulf of Mexico. These two elements together should give rise to a growth in the ILS sector.”

Q: Will the widespread expectation some reinsurers and insurers will increase premiums for some programmes at the next renewals have a spill-over effect into the ILS market?

A: “In the past reinsurance rates have increased substantially when catastrophes have impacted upon the capital of insurers and reinsurers. The 2017 events appear not to be capital events on the whole but rather have impacted on the prots insurers and reinsurers have earned. This is in part due to ILS.

“ILS will continue to protect the capital of insurers and reinsurers and, in so doing, will reduce the impact of these and future events on rates. It is entirely plausible that ILS rates and reinsurance rates could rise and fall relatively independently based upon how the capital of each of them is exposed to catastrophes.”

Q: London and Singapore are looking to put infrastructure in place to enable these centers to compete with more established ILS centres such as Bermuda, the Cayman Islands and Guernsey. Can you comment on recent developments towards this objective in both London and Singapore?

A: “The entry of London and Singapore – no doubt to be followed by some other jurisdictions – into the ILS arena is not surprising. It reects the growth of the ILS market and its diversication from its focus on Gulf of Mexico perils.

“London has established a scal framework and has legislated to enable the use of appropriate corporate structures to enable London to become an ILS centre. The one question that remains is how the regulators will act to enable ILS deals to operate smoothly. The regulations provide time limits for regulatory approval which the Prudential Regulation Authority [PRA] has said it will improve upon in all but exceptional cases.

“It remains to be seen if it can live up to this statement of intent and, even if it does, whether the timescales offered are truly competitive with tried and tested centres such as Bermuda and the Caymans. That said, it is clear HM Treasury and the PRA are determined to make a success of the project.

“Singapore’s entry into the market shows the increasingly global nature of ILS. The way in which Singapore is coming to the market, offering incentives for deals to be located there, demonstrates its determination to be the leading market in south-east Asia for ILS as it is for reinsurance.”

Q: The insurance-linked securities sector is looking to expand beyond its core property catastrophe reinsurance space of hurricane/windstorm and earthquake risks into other classes of business including ood, cyber and even liability lines. How do you see the expansion of the ILS market over the next three to ve years and what will be the key factors driving the development of the market?

A: “ILS products have shown how they can protect the solvency of insurers and reinsurers against major nat cat losses. There is no reason why they cannot protect against other types of major loss as well. Increasingly, modelling and objective indexing of other loss types are being developed that enable ILS products to be constructed. In addition, ILS products can be more attractive than insurance products, particularly those involving which require no proof of loss or adjustment. These can enable swift uncomplicated payment particularly if a parametric trigger is used.

“Parametric trigger products can be very useful in covering against nat cats in poor areas. Immediate payment can ensure rapid relief efforts. This is why the British and German governments are looking at ILS as a way to give aid to catastrophe-imperilled regions.

“Beyond this, the desirability of liquidity in an asset class should lead to more tradable products with potential development into synthetic products. If this is achieved, the means of purchasing protection against natural catastrophes, as well as other perils, could be radically altered.”

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