September 10th, 2018

Maintaining Momentum - GC@MC Commentary

Posted at 1:00 AM ET

potter_des_photograph1 Des Potter, Managing Director, GC Securities*


  • Innovation key to London’s ILS success
  • Robust pipeline of new applications
  • Industry must work proactively with Prudential Regulatory Authority

In May, SCOR became the first reinsurer to use the new UK ILS regime to issue a cat bond. GC Securities,* as sole structurer and bookrunner, was the first broker-dealer to navigate the requirements of the legislation. Des Potter, Managing Director, GC Securities and a leading figure in the work to establish the regime, discusses the potential for ILS growth, and how London can build on its early success and become an innovation hub.

The Risk Transformation Regulations came into force in December 2017. Since launch, two insurance special purpose vehicles (ISPV) have been authorized and over USD 350 million of securities issued to support the transfer of risk to these vehicles.

“The UK ILS framework is an excellent example,” explains Potter, “of how an industry body such as the London Market Group can work collaboratively with Government to bring innovative and long-lasting benefits to the UK (re)insurance economy. The two transactions to date are a positive start, but what lessons can we learn to enable London to build on this and achieve its ambition to become a global hub of innovation for the ILS market?”

London has an unrivaled pool of underwriting, broking and analytical talent, including many leaders in specialty insurance classes, explaining the number of large scale and complex risks that pass through it. Add to this its strength in the global financial markets and reputation for prudent regulation and you have all the ingredients for success in transforming (re)insurance risk into securities for capital market investors.

“The key to London’s success will be innovation that matches the right risk, with the right capital, at the right price, in the most efficient form of risk transfer,” he believes. “The experience of the reinsurance market after the catastrophe losses in 2017 demonstrated that for many, the ILS market is currently the ‘right’ source of capital for property cat risks. The ILS market has been a catalyst for the current evolution in the reinsurance market – London must be at the forefront of this change to maintain its global presence.”


Source: GC Securities Proprietary Database

The UK legislation is robust and the bespoke tax regime that allows the qualifying risk transformation vehicles to be exempt from corporation tax and the securities issued to be exempt from both withholding tax and stamp duty provides an internationally competitive framework for the ILS market.

“However,” Potter points out, “we must recognize that the new regime marks a steep learning curve from a regulatory standpoint and the Prudential Regulatory Authority (PRA) have been diligent in their assessment of applications. They are deploying significant resources to assess each application and it is also understandable the challenge involved to confirm all aspects of the Solvency II regulations for ISPVs are fully satisfied, as with each authorization they are setting market precedents. It is also important to understand the regulatory environment of each cedant, to enable them to obtain full capital credit for risks transferred to UK ISPVs.”

“The industry must work proactively with the PRA to help their understanding and mitigate any concerns they may have,” he adds. “Particularly with the three mandatory conditions regarding the contractual arrangements to transfer risk to an ISPV, namely that it is at all times fully funded, that the transfer of risk is effective in all circumstances and that the claims of investors are at all times subordinated to the (re)insurance obligations of the ISPV.”

The pipeline of new applications, where Guy Carpenter is engaged, is robust and includes the first full scope multi-arrangement ISPV, registered as a Protected Cell Company as well as applications that will bring new sponsors and insured perils to the ILS market.

“A lot of effort has been invested to develop the UK ILS framework,” he concludes “and this provides a landmark opportunity to strengthen London’s influence in the global (re)insurance market. The PRA will continue to apply the necessary level of diligence to each application and potential investors and risk transfer counterparties would expect London to operate to a high standard. The key is to ensure it is a standard that is commercially competitive and drives growth in business and employment opportunities for the UK economy.”

*Securities or investments, as applicable, are offered in the United States through GC Securities, a division of MMC Securities LLC, a US registered broker-dealer and member FINRA/NFA/SIPC. Main Office: 1166 Avenue of the Americas, New York, NY 10036. Phone: (212) 345-5000. **Securities or investments, as applicable, are offered in the European Union by GC Securities, a division of MMC Securities (Europe) Ltd. (MMCSEL), which is authorized and regulated by the Financial Conduct Authority, main office 25 The North Colonnade, Canary Wharf, London E14 5HS. Reinsurance products are placed through qualified affiliates of Guy Carpenter & Company, LLC. MMC Securities LLC, MMC Securities (Europe) Ltd. and Guy Carpenter & Company, LLC are affiliates owned by Marsh & McLennan Companies. This communication is not intended as an offer to sell or a solicitation of any offer to buy any security, financial instrument, reinsurance or insurance product.

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