In March the government declared its ambition to turn London into a leading centre for ILS insurance. It is a welcome development for the city and the insurance industry.
Currently, Bermuda holds the crown as the leading centre for Insurance Linked Securities (ILS). According to The Bermuda Monetary Authority (BMA), the size of the market in terms of Total Issued Deal Volume has increased from US$1.2bn in 2010 to US$7.7bn in 2014*. This is still considerably lower than the peak volume of US$15bn achieved before the financial crisis of 2008*. It does, however, demonstrate a returning confidence in the market and suggests there is considerable scope for growth.
Bermuda has a mature ILS market, and the number of providers has grown from 12 to 40-50 providers in the last 3-4 years. Compared with traditional (re)insurance, the ILS market is small, accounting for approximately 4% of global reinsurer capital, which is estimated at US$570bn. The majority of deals issued, around 65%, are related to North American perils. This reflects the fact that the majority of primary insurers in the ILS market are US-based firms. By contrast, European sponsors of ILS deals are mainly reinsurers, many of which are U.K.-based.
The U.K. is recognised as a leading hub for traditional reinsurance business. With the introduction of a new ILS hub in the London market, the UK reinsurance market will have access to ILS providers on their doorstep. UK-based reinsurers can look to home-grown providers, rather than reaching out to the ILS market in Bermuda.
There is therefore the potential to develop a profitable ILS market in the UK. London is a natural home for this business. The expertise of London market underwriters combined with the city’s pre-eminent position for global (re)insurance is a solid foundation on which to build. New entrants to the ILS market in the UK can leverage technology from day one.
A company looking to capitalise on this opportunity needs to assess a number of factors. Of these, the ability to process complex financial instruments efficiently and accurately is paramount. The right technology can be critical.
Lessons to be learned from the Bermuda market
Our experience with Bermuda-based ILS providers has revealed the labour intensive nature of processing. Companies start out with simple, manageable spreadsheets to record the details of individual deals. Initially, this is a cost effective way to start-up. However, as the business grows so does the number of spreadsheets. What started as a simple processing method quickly becomes complicated and resource heavy. Output falls and errors can creep in. Generating information for regulatory reporting or management information gradually becomes a burden.
In 2012 Eurobase started working with Horseshoe Group, the foremost Bermuda-based independent insurance manager and reinsurance transformer dedicated to the ILS market. Over an 18 month period Eurobase implemented synergy2 for the company’s underwriting, claims, reinsurance and reporting operations across its Bermuda and Cayman Island operations.
The raft of 30 to 40 spreadsheets that had been used to provide reporting documentation was replaced with a single system that automatically populated specially customised reports. The adoption of synergy2 by Horseshoe Group led to data reporting efficiencies along with improvements in the recording and tracking of the capital market allocation of funds. Importantly, the system allowed the company to better meet the various needs of its disparate clients: trustees, private investors, banks, hedge funds and private equity firms. There was superior data integrity and less room for errors.
The new system is now embedded within the Horseshoe’s business proposition and helps the business convince potential clients of its capabilities and resources as a provider of exceptional services for the ILS market.
Entrants considering the ‘new’ London market can learn from these experiences. By having the right Policy Administration System (PAS) in place from the outset, new ILS providers can grow rapidly, but in a controlled way. Technology can be relied upon to deliver vital information quickly. Experienced employees are no longer required to manage ILS data administration. Skilled staff can be deployed elsewhere in the business as confidence in the accuracy and integrity of system-generated information is realised.
Cost and speed of change
A good PAS will support the full lifecycle of placing a reinsurance risk, as well as capture comprehensive details about the nature of the risk. To support ILS requirements, the system will need to link the risk to the capital market, such as the fund and shareholder participation in the fund. A fund itself has a lifecycle, so the ability to track and report on the placement of a fund is important, particularly around capturing key dates.
The challenge in these scenarios will often lie in the cost and speed at which their system changes to meet these requirements. In an organisation where the ILS operation does not have, or can demand, the priority for such changes, these adaptations can be very slow to implement. Demands from other parts of the business are likely to take priority. Furthermore, if your system is from a third party, this requires to be supported by an organisation with the knowledge and experience working with ILS operations because understanding the factors influencing their solution will be reflected in the system they produce for you.
By contrast, synergy2 has ‘out of the box’ functionality to meet the needs of ILS transactions. The system integrates everything from underwriting and capital market allocation through to credit control. Its ‘plug and play’ functionality also means it is easy to interlink the system with an existing PAS.
For a start-up operation, full implementation of Eurobase’s synergy2 platform for ILS can be achieved within a 6 to 8 week timeframe at a low, risk free cost.
Companies should weigh up the costs, benefits and timescales of adapting an existing PAS compared with implementing a fully functional, ILS-ready system. Having the right technology in place from the outset will save hours of work and headaches in the future. Importantly, it demonstrates to clients your commitment to the market and to service standards in the delivery of deals.