- London can establish itself as the global hub for innovative reinsurance risk transfer
- U.K. regulators must be more responsive to enable the U.K. market to be more competitive
- Developing an insurance-linked securities (ILS) market will help London maintain its global standing
London’s new ILS framework can make the City the global hub for innovative ILS solutions – but only if the U.K. regulator adopts a proportionate and responsive approach appropriate to the nature, scale and complexity of the risks assumed, says Des Potter, Head of GC Securities*, EMEA, Guy Carpenter. Potter sits on the London ILS Task Force.
“If we can leverage London’s broking, underwriting and actuarial talent to provide innovative solutions to big challenges such as the protection gap in both mature and emerging markets, London can become the global center for reinsurance risk transfer,” he says.
“The U.K.’s success has got to be based on innovation. The goal is not to stem the flow of business going to Bermuda or to grow London’s market share of cat bonds, but to take ILS to its next stage of evolution using the unique skillset we have in London,” Potter explains.
The London Market Group’s “London Matters” report highlighted that although reinsurance is the largest class of business underwritten in London, it continues to lose global market share – it fell from 15.0 percent in 2010 to 12.3 percent last year – a key factor being lower cost of capital in ILS business transactions in rival jurisdictions like Bermuda.
“London’s ILS framework will be vital in enhancing the City’s standing in the global reinsurance market. The big challenge is whether the U.K. regulator can provide the speed and certainty required to enable the U.K. to compete effectively with other ILS jurisdictions. The U.K. has a strong global reputation, but as the ILS market evolves, the regulator will need to be far more responsive than it is today,” Potter warns.
“After the next major property catastrophe loss event, reinsurers will almost certainly turn to the ILS market for recapitalization. Right now, London’s infrastructure is not efficient enough to allow capital to be deployed quickly or cost effectively,” he explains.
He adds, “If there were another Katrina tomorrow, it would take the U.K. many months to approve plans for capital to flow in, in which time Bermuda would have raised billions. London’s market share could drop materially within a few weeks of such an event.”
Legislation for the ILS framework is currently awaiting approval in the U.K. Parliament and is expected to come into force by late October. The regulations will allow the set-up of insurance special purpose vehicles and protected cell companies with exemption from corporation tax on insurance risk transformation profits and a complete withholding tax exemption for non-U.K. investors.
“These enhancements are going to put London in a better position,” Potter says, adding that there was “good will” towards the framework from the U.K. Government, financial markets and the next generation of brokers and underwriters.
“I do believe London’s ILS market will gain traction,” Potter notes. “The regulator will face a learning curve initially, but over a five-year horizon I really believe that, with its access to both insurance talent and financial markets capital, London can offer a market-leading alternative for risk transfer to the capital markets.”
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*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.