ILS touted as “the next evolution” of product support and development coming out of the Bermuda reinsurance market

Expect insurance-linked securities (ILS) to be the next evolution of product support and development coming out of the Bermuda reinsurance market, says the CEO of the Bermuda Stock Exchange (BSX).
Greg Wojciechwski spoke to Canadian Underwriter in a telephone interview while visiting with Canadian business leaders in Toronto on Nov. 17.
In the conversation, he listed ILS issuances for perils that would be of direct relevance to the Canadian context. “Bonds that we’ve seen list have traditionally written on places where you would see the need [in Canada],” he said. “So, for example, wind storm in regions that are more prone to experiencing that kind of catastrophic peril.”
He also noted ILS instruments for earthquake risk.
“One of our most recent listed issuers is a bond structure called Embarcadero [Re], which has been done by the California Earthquake Authority,” he said. “For the Canadian market, is there maybe an avenue for quake? Are there seismic areas where they might be losses? That could be something where additional capital cover could provide some [additional capacity].”
Wojciechwski said the capital markets in Bermuda are quite interested in having exposure to [ILS] securities and they are willing to invest, “and that is the perfect initial ingredient to the development of a more robust market.”
He observed the BSX and the Bermuda Monetary Authority have worked on initiatives that would make the ILS market increasingly attractive to investors looking for diversification in their portfolios. Currently a specialized market, ILS issuances amount to between $12 billion and $15 billion.
One such initiative has been the establishment of a more streamlined process to create special purpose insurers, through which risk is transferred into a capital markets.
“Since the Bermuda Monetary Authority introduced those changes,” Wojciechwski says, “we’ve been marketing this thing strongly from the BSX perspective, and we’ve gone from no bonds to over 22 ILS securities with a market cap right now of $2.3 billion.”
MSA Research estimated in June 2011 that Canadian reinsurers could grow their assumptions by approximately $700 million to $1 billion without requiring much or any additional capital. That is the equivalent of a Slave Lake wildlfire, which was the second-biggest insured catastrophe since the Ice Storm in 1998.
As a result, some debate exists as to whether the Canadian market as it currently stands is well-suited for ILS-style instruments.