There are a number of new domiciles and jurisdictions for locating and housing insurance-linked securities (ILS) transactions coming into view, but they will all have to go through the thorough testing that is required to ensure their robustness and flexibility, before success can be guaranteed.
Only a decade ago there were very few places to think about locating an insurance-linked security (ILS) transaction, a catastrophe bond, or another type of collateralised reinsurance vehicle.
Now, new sponsors of ILS and collateralised reinsurance, as well as ILS fund managers, have a wealth of choices at their disposal, with different jurisdictions offering different levels of experience, flexibility and speed to market.
For the newer ILS domiciles, such as the United Kingdom and the still-emerging Singapore, there must be a period of thorough testing before deal-flow will really pick up, as there are always going to be issues to iron out, processes to put through their paces and regulators to educate.
The UK is a good case in point, having now seen two ILS transactions completed using its new ILS regulatory framework, the first being the NCM Re reinsurance sidecar like vehicle launched by Neon, then more recently by the issuance of the first UK catastrophe bond in the $300 million Atlas Capital UK 2018 PLC (Series 2018 ISPV 1).
Sources suggest that while both of these transactions went ahead, they raised teething issues and highlighted where additional work or more resource is likely to be needed in future.
One area is of course the speed to market issue, a key consideration for any jurisdiction looking to operate in the ILS space.
Established market leader Bermuda has shown that being able to turn around applications rapidly is key to sponsors, as is the ability for them to repeat transactions with a much smaller amount of regulatory oversight (key for collateralized reinsurance and ILS funds looking to locate a transformer vehicle.)
In the UK, we’re told that the level of resources and expertise at the regulator are currently seen as one teething issue that needs to be overcome. But of course the regulator cannot possibly know precisely how much dedicated ILS resource it will need until it understands the potential deal-flow that could be coming in future.
So it is only through doing, with real transactions being brought to market, that the regulators can learn what is really required of them and this is one area that thorough testing is required, to ensure a regulatory regime can be implemented in a manner and at a pace that suits the sector it is targeting.
Therefore we should expect that as new ILS jurisdictions come online, there will be a period where the speed of bringing a transaction to market is not as fast as it eventually will be, while the ease of transacting may also be compromised for a period, while initial transactions test the regulatory regime.
Most of the testing is going to be focused here, on how easy it is to use a new ILS jurisdiction and how fast deals can be completed there.
Cost is, of course, another factor, along with access to service providers, but most of the jurisdictions that have ILS regulation also now have a level of service provision sufficient to get a deal done at least.
But another factor where ILS jurisdictions need to be tested, and again this is a test largely for the regulators and market facilitators, is in how open to new structures, offerings and terms they are prepared to be.
The first ILS transactions brought to market through a new ILS jurisdiction are likely to be relatively vanilla, in the grand scheme of things. But very quickly afterwards, jurisdictions should expect the requests from sponsors to get ever more complex, while service providers are likely to ask to be able to do more.
So an openness to ongoing innovation in the ILS sector is key for any ILS jurisdiction to be successful.
It is not going to be sufficient to expect that all ILS transactions and structures will look exactly the same and try to achieve precisely the same thing. Change is an ongoing process in the ILS and alternative reinsurance markets, hence jurisdictions will need to be prepared to listen to the requirements of the market, while continuing to ensure their regulatory regimes meet those requirements on an ongoing basis.
But again, this is something that can and will only be tested once a jurisdiction has a functioning ILS regulatory regime and begins to make progress in the market.
However it is vital that the discussions prior to launching new regulation include at least an awareness that this is a complex financial market which is still evolving, hence the regulators and the jurisdictions processes should expect to be continually tested as they prove themselves a viable ILS alternative.
Jurisdictions will be thoroughly tested and it’s advisable to be ready for honest feedback as the ILS market needs to know it can rely on the support of regulators and local stakeholders if new ILS hubs are to be created.
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