At the same time, Bermuda is still the favoured jurisdiction for catastrophe bond issuance, evidenced by a record breaking 2020 for this sub-segment of the ILS space. However, there’s now more choice than ever for sponsors with new jurisdictions, notably in Asia, increasingly looking to grow their market share.

With this in mind, participants highlighted Bermuda’s robust risk transfer infrastructure, adaptive regulatory environment and ability to innovate, and explored what the island must do to ensure it continues to win new business.

While the pandemic has grabbed the headlines for the past 18 months or so, climate change remains and as the conversation has intensified, the universe of sustainable and responsible investing has expanded and is now often debated in the ILS space, and our roundtable was no exception.

Alongside rising ESG demand and also elevated demand from more traditional investors, the longevity of current market conditions was questioned, as was the potential for the trapping of capital from Covid related business interruption uncertainty.

Bermuda attracted a lot of startup capital in 2020 ahead of expected reinsurance market firming, as losses related to the pandemic combined with the lower for longer interest rate environment and impacts of a prolonged soft market state.

While there’s some signs that the market cycle is close to its peak, current market conditions are expected to persist. With this in mind, and also the fact consolidation remains strong across the sector, why should newcos and fresh investor capital look to Bermuda?

TOM JOHANSMEYER: Having recently made the decision to move here, I can tell you there’s a lot more advantage to Bermuda than just the legal or regulatory benefits. I chose Bermuda because it lives up to its reputation as the ILS community’s hub for collaboration and innovation. PCS’s range of new solutions – going back to our first steps into specialty lines loss aggregation in 2017 – all came from Bermuda support.

The Bermuda market helped us develop our specialty lines methodology (first for PCS Global Marine and Energy), delivered our seed data for large onshore risk losses, and was instrumental in getting loss reporting for Japan and cyber off the ground. And Bermuda transacts – the rest of the world follows.

SHERMAN TAYLOR: The robust insurance infrastructure in Bermuda has historically acted as a stabilising factor in times of great market stress; the fresh capital deployed in the Bermuda insurance market in the last six months signals increased investor confidence and will ease capacity and rates concerns over time.

In the interim, we can expect further consolidation and changes to the global insurance landscape. Bermuda’s deep insurance roots, rich talent pool and commitment to innovation provide a sense of confidence to investors, and this is one of the main reasons why newcos and fresh capital continue to look to the jurisdiction.

BRAD ADDERLEY: It’s the only market in the world which has the following characteristics: One, there’s Solvency II equivalence. Other than Switzerland or Hong Kong, who else is Solvency II equivalent? At some point you’re going to write European business.
Two, you get NAIC approval for the U.S. market. So, again, of our competitors, who has got NAIC approval and specific jurisdiction approvals in different states? The others don’t have it.

So, now I can write U.S. business, I can write European business. Obviously, there’s conditions to all of that, like the amount of capital, rating and track record, but you can’t do them in any other jurisdiction.

But on top of that, when you think about Bermuda’s competitors, who actually has a real reinsurance marketplace? Whereas in Bermuda, you can come and actually do lots of deals because people are around you. Well you can’t do that in all the other jurisdictions. So, whether Bermuda is expensive or not, there’s an ease to doing business because you’re surrounded by it.

AURORA SWITHENBANK: When we were looking to set up Vantage, the choice of Bermuda was easy. Our chairman, Dinos Iordanou, and our CEO, Greg Hendrick, have long-standing experience building and operating Bermuda-based businesses. The pool of underwriting and operational talent on the island is deep. And Bermuda provides
this platform within a strong and consistent legal framework supporting capital formation. It is the reason why investors are comfortable with the jurisdiction, having done extensive due diligence and having had good historical experiences in Bermuda.

Bermuda remains the premier jurisdiction for newcos and the hub for ILS capital formation, and on a personal note, I’m thrilled to call Bermuda my new home.

DARREN REDHEAD: For us at Kinesis/LCM Bermuda provides an infrastructure/resources in service providers and most important a willingness/understanding from regulators to help you adapt to changing market conditions.

KATHLEEN FARIES: Bermuda is known for being able to balance its robust regulatory framework with being nimble and commercial. This is a very difficult balance especially when you are also a Solvency II regime. In addition, many of the other jurisdictions that are competing for this start-up activity appear unable to rival the level of expertise, experience and “plumbing” that Bermuda has built up over the years.

AARON GARCIA: Investor capital should look to Bermuda because it is a tried and tested centre of excellence for risk taking. Over the past decade, the island has consistently maintained its global reputation as ‘world’s risk capital’ due to the strong leadership of Bermuda insurers, reinsurers and asset managers, and their ability to work hand in glove with the Bermuda Government and regulators.

This mutually beneficial relationship has enabled Bermuda to create a regulatory framework that fosters a culture of innovation and customer-lead service, whilst also meeting international regulatory standards. For example, the introduction of the special purpose insurer (SPI) legislation in 2009 which enabled Bermuda to gain global recognition in the alternative risk transfer market. It’s this unique balance of discipline and creativity that helps create unparalleled opportunities for investors, making it an attractive choice for new capital.

2020 was a record breaking year for cat bond issuance and, so far, 2021 is breaking records once again. But while Bermuda remains the domicile of choice for cat bonds, how does the island make sure it continues to win new business amid the rise in other ILS jurisdictions?

RICHARD LOWTHER: The key to Bermuda continuing as the domicile of choice for all forms of ILS hinges on remaining competitive in key areas:

Speed to market – For the major onshore domiciles looking to make inroads into ILS, it is hard to see how their large and complicated regulatory framework can be as nimble and develop the inhouse expertise to match Bermuda. ILS structures continue to evolve and innovate at a fast pace and there is a steep learning curve for law makers and regulators. Overall, however, ILS is a small asset class comparatively. Allocating adequate resources to appropriately regulate ILS makes sense for a concentrated specialist domicile like Bermuda but less so for onshore financial centres.

Competitive costs – Institutional investors are under enormous pressure from their stakeholders with regards to the fees they pay their managers. The knockon impact to ILS in Bermuda is not only to offer competitive fees but also to advocate for helping to compress all aspects of the insurance value chain and offering competitive, ‘turnkey’ structures.

Attracting and retaining talent – A by-product of the global pandemic has been an acceleration in virtual meeting and remote working technology. The ‘digital nomad’ concept favours the quality-of-life benefits of living in Bermuda and will help to retain talent. Bermuda must remain competitive with transparent and expeditious immigration and continue to invest in local education and

KATHLEEN FARIES: While the jurisdiction continues to lead the way, Bermuda must keep increasing the competitive landscape in view as the business can easily go elsewhere. The jurisdiction’s talent pool has long been a competitive advantage and they must intentionally ensure that they continue to foster and attract talent to Bermuda.  Additionally, in order to improve and evolve the volume and liquidity of these assets, complacency must be avoided and the sector must be open to listening to the needs and demands of the business.

Certainly, there is still a tremendous amount of potential innovation that could be applied to securitization of risk and Bermuda could and should lead on this innovation by leveraging the Digital Asset regulatory framework already adopted in the jurisdiction (DABA).

TOM JOHANSMEYER: Frankly, there’s no substitute for transacting. Bermuda needs to show that it can continue to lead the world in fresh and useful ideas, but it also needs to turn them into practical, repeatable reality. Innovation isn’t calling in every favor you can to show that you can get an exotic or unusual transaction to market. Rather, it’s identifying a difficult problem, developing a solution, and showing that the solution is relevant enough that it can – and will – be done again.

BRAD ADDERLEY: Clearly, you’ve seen some cat bonds done in Singapore, more so this year than ever. Put simply, when they subsidise it, why would they not use the money. But the question is, what happens when that money runs out?

We’ve been working with the BMA to ensure that the experience in Bermuda is as easy and as seamless as possible for the ILS space.

What’s happened is, the BMA has been really, really good about this, they said fine, let’s look at what we’re doing, let’s look at how we’re doing it and let’s improve it. Let’s improve our system and let’s improve how we go about it.

SHERMAN TAYLOR: Insurers recognise that value for money is not necessarily the same thing as the lowest cost. Bermuda successfully competes by providing high quality, low friction service, while simultaneously keeping the island’s pricing and speed to market highly competitive. This is how Bermuda sets itself apart in a crowded global insurance sector. Ultimately, it is Bermuda’s value for money proposition that will keep it in its position as the leading domicile for ILS.

AURORA SWITHENBANK: Bermuda remains the go-to for cat bond capital raising. Vantage’s debut cat bond earlier this year used Bermuda as its domicile. I think it’s difficult for other jurisdictions to catch up with Bermuda, given the ecosystem of a strong legal and regulatory framework, top-notch service providers, and a large number of significant domiciliary sponsors and investors.

As has historically been the case, I think remaining open to a dialogue with sponsors, service providers, funds, and end investors and being thoughtful and balanced around emerging issues and trends – such as ESG – will inform any further evolution in the framework surrounding cat bonds.

AARON GARCIA: If we, as market participants, ensure that we continue finding innovative solutions to better serve our clients – whether that’s addressing an evolution in standard practices, such as ESG, or to absorb new areas of risk, such as cyber and pandemic – the island will continue attracting opportunities.

DARREN REDHEAD: As I said previously, speed to market is a big advantage/understanding current market conditions really helps Bermuda maintain its pre-eminent position.

Clearly, responsible and sustainable investing continues to gain real momentum, so what must Bermuda do to ensure it attracts the growing base of ESG focused investors?

BRAD ADDERLEY: I think one, the BMA has come up with its own guidance, looking to ESG and making sure things are ESG compliant. Two, I think we could argue that cat bonds, generally, have always been ESG compliant. Why? Because they are about protecting the environment. And three, we have a history of it here in Bermuda. In fact you have things like Africa Risk Capacity reinsuring flood and drought reinsurance in poor nations in Africa. What could be any more ESG than that?

So, I think Bermuda, in some ways, has been doing this for years, before ESG became a hot topic. It now is an important focus, and Bermuda needs to do a better job talking about ESG and what it is doing, and what it has been doing naturally over the years.

SHERMAN TAYLOR: Bermuda must treat ESG as the “new normal” of business, and there are already encouraging signs that the key players in the jurisdiction are fully on board. In the ILS sector for example, market participants have long recognised the necessity of incorporating ESG into their activities in order to continue to access fresh capital. The next logical step for Bermuda is to introduce regulations to combat green-washing in the jurisdiction. This will keep Bermuda in step with the rest of the world and attract the rising tide of ESG focussed investors who are becoming a powerful force in the capital markets.

The recent announcement that the Lloyd’s market will no longer provide new insurance cover for thermal coal-fired power plants, thermal coal mines, oil sands, or new Arctic energy exploration activities from 1 January 2022 is a clear signal that the ESG is becoming more significant to the insurance market. As a result, capital could be freed up and redeployed into the ILS market if the right framework is in place.

KATHLEEN FARIES: A key aspect moving forward for not only Bermuda as a jurisdiction but the ILS sector as a whole is the need to develop a unified ILS ESG framework. Given Bermuda’s position in the sector, they certainly could lead the way in this initiative. Furthermore, Bermuda is the centre of risk transfer for natural, weather-related catastrophes and there is the potential to extend this expertise to a leading position in climate related risk transfer and financing.

The investor community are increasingly reviewing the ESG properties of their portfolio, sourcing ESG compatible risk and prioritizing ESG reporting. With this in mind, Bermuda should be listening to investors and using their desire for sustainable investing moving forward to determine how the intellectual capital and experience in Bermuda can be leveraged to offer investors real value.

AARON GARCIA: Interest in ESG performance – from regulators, investors, media, customers & employees has never been greater. As leaders in the (re)insurance industry, we have an important part to play in helping our customers prepare for and navigate this complex issue. While ILS is an intrinsically positive asset class with its role in protecting society against the earth’s perils, attracting ESG-focused capital requires us to go beyond this. At Hiscox, we believe that the benefits of an ESG approach to ILS investing is tangible. For example, from an environmental point of view, quantifying the impact of climate change on risk is essential to achieve sustainable returns.

AURORA SWITHENBANK: Different regulators, investors, and third-party validation firms have varying definitions of what constitutes ESG. Right now, there isn’t a lot of consensus on some basic questions like which ILS securities could be considered ESG investments. Consistency of definitions is one of the areas where I see a lot of struggle.

I think there’s a lot of scope for engaging with the industry and investors to set standards for disclosure and definitions – without creating burdensome or overly bureaucratic incremental reporting requirements.

We see milestones being established across different industries to achieve
various ESG goals by 2030 or 2050. I think re/insurers should also consider
such goals to set an objective to strive for. In that way, we will have progress, and even if we don’t achieve these distant goals, it can form the basis of an ongoing dialogue.

RICHARD LOWTHER: Where Bermuda could help lead ESG investing is to support the development of an independent scoring and evaluation framework to grade ILS strategies and managers on ESG. Large institutional asset owners such as pension, sovereign wealth and endowment funds are at the forefront of promoting ESG investment mandates. To attract these investors, Bermuda already offers ‘institutional-quality’ asset management infrastructure but formalizing an ESG framework would further cement the domicile as the leading place for blue-chip capital.

TOM JOHANSMEYER: Specifically, the Bermuda market needs to identify original risk that needs sufficient capital and can be executed without the need for side deals and other concessions. The problem is an analytical one. Take solar power. One of the biggest problems in solar right now is hail. Instead of evaluating new technology relative to historical weather swaths and representative losses, you’re more likely to see a focus simply on loss runs. That’s not how you get progress. There’s an industrywide perspective that can make solar easier to write in the face of difficult threats like hail.

With strong pricing execution already evident in the cat bond market, do you feel that rising investor demand, coupled with added ESG demand, could bring additional capital and risk pushing the wider ILS market into a phase of softening? And, whether you feel this would be a healthy representation of capital efficiency?

TOM JOHANSMEYER: ESG is going to be tricky. If anything, rising ESG demand could act as a constraint on new capital flowing into the ILS market. Two years ago, ILS funds could convince end investors that a catastrophe focus was inherently ESG. Those days are gone. We need to develop real ESG products now. The first fund to launch one that is sustainable, repeatable, and feasible economically could gain a profound first-mover advantage.

The challenge for the ILS market is to achieve ESG relevance while being so far away from the original risk. I’ve been asked several times. Reinsurers and ILS funds can’t influence claimant behavior and even struggle to influence insurers on ESG. Once you work your way up to the retro market, it can take forever to see the risks you cover – if you even get to at all.

RICHARD LOWTHER: Ultimately, one should not confuse the structural competitive advantage ILS has to assume peak zone cat risk with a lack of underwriting discipline. ILS investors demand high levels of transparency, impose granular investment guidelines and require frequent fair value reporting on their portfolios. There are simply fewer places to hide ‘soft market sins’ in an ILS fund.

One must also not assume that ESG driven demand for ILS investing means
writing business at lower margin. Targeting capacity as part of an ESG framework has strong societal benefits but providers of cat capacity need to be adequately compensated for the risk they assume.

BRAD ADDERLEY: We clearly see people commit more money to this marketplace. We have people like Integral with Richard, and some of the largest ILS funds recently have been formed with $500 million, $600 million, which says a lot about the people running the firms, right. So, we see these funds growing; there’s no question about that. So therefore there’s more capital in the marketplace from ILS funds. That has to affect the price of these products. It has to affect the products themselves. It’s got to because we’re not talking about $100 million coming in, we’re talking about $500 million coming in or $600 million coming in. Which, to me, has to affect the market and soften it. 

AURORA SWITHENBANK: I think the tightening we’ve seen in the cat bond market is being driven by a reassessment of the value of the liquidity of those securities, something I’d thought was long undervalued by the marketplace.

Of course, when new capital flows into the space, it has the potential to drive pricing; however, the amount of capital flowing into ILS is dwarfed by the capital movement in the broader reinsurance market. Although the reinsurance and ILS markets can get out of step, they are still tethered, and any mismatches correct over time. ILS investors and funds have shown good price discipline in recent renewals cycles and I expect that discipline to continue.

KATHLEEN FARIES: Investors will always seek the best yield and best execution. The move to collateralized reinsurance over the last 5-8 years has been coupled with challenges and in some instances surprises for investors given the level of nat cat events and most recently the exposure to COVID related claims. It would appear that many investors are interested, at least for the time being, in securitized risk that has a bit more certainty around terms and returns.

The ILS market should shift our focus to how we can deliver securitized climate risk related products to capital as efficiently as possible in an effort to increase the volume of potential assets, rather than diluting the traditional pool of UNL risk that is in the market. Climate risk is one example but there are certainly others that are in need of more capacity and product innovation such as cyber risk.

Ultimately, the re/insurance market is permanently cyclical and pricing will always be a function of capital supply and demand for products. The ILS market needs to become less reliant on property cat exposures and find ways to structure and price other classes of business.

SHERMAN TAYLOR: The ever-shifting dynamics between capacity, pricing and demand will lead cycles in the insurance market, and a phase of softening is inevitable.

One reason why capital is moving from the traditional reinsurance market to the ILS market is the search for more capital efficiency. The ILS market has responded well to this challenge, and the asset class is considered a very good representation of the best use of capital.

DARREN REDHEAD: Even with surplus capacity we have seen continued price increases, which in my view is required to maintain pricing adequacy, I think there is a realisation that as a sector we need to maintain this momentum.

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