New players moving in on EU catastrophe cover

Gibraltar’s bid to capture a significant share of the expanding $US 7.5bn a year world market in Insurance Linked Securities (ILS) has been given a real boost, with news that a stock exchange is to be established and the arrival of one of the largest independent ILS managers worldwide

The Financial Services Commission (FSC) published in September its EU Solvency II compliant ILS regulatory Guidelines, after the Government established a working group to provide expertise and feedback from ILS experts around the world.

Gibraltar plans to offer a new EU domicile for catastrophe (CAT) bonds, ‘sidecars’ and collateralised reinsurance-based ILS transactions, broadly defined as financial instruments – typically to cover hurricanes, windstorms or earthquakes – and the result of a convergence between capital markets and the insurance industry.

Although concentrating on listing of over 100 open-ended funds in its first year, the new Gibraltar Stock Exchange (GSX) – a private sector venture that received an FSC license in October – aims to include ILS structures from 2016, before going on to be a trading exchange.

One of the largest independent ILS managers, Horseshoe Group, with $US 8bn assets under management in Bermuda, Cayman Islands and Ireland, gained an FSC license to operate in mid-October. Top investment bankers and lawyers in the New York and London capital markets historically put ILS offerings together.

Bullish on potential

Horseshoe Management (Gibraltar) was attracted to the jurisdiction following meetings with the Finance Centre, FSC and industry representatives in New York; with publication of the FSC Guidelines, Gibraltar has demonstrated its “collective willingness to make ILS a success”, Andre Perez, Horseshoe chief executive, remarked.

US wind and earthquake perils dominate the ILS market, but it is necessary “not only to expand the perils, but also the geographical regions it covers”. Perez added: “My sentiment is that a good percentage of the growth is going to come from Europe. This is why I am quite bullish about Gibraltar’s potential for ILS.”

He concluded: “Traditionally, ILS transactions in Europe have been done in Ireland as it was the only EU jurisdiction available. The problem is that the Irish regulatory system is viewed by some market participants as too cumbersome and antiquated for ILS transactions, where speed to market and flexibility are essential. This is where I think Gibraltar is going to shine…”

Still further good news came from Mark Byrne, Bermuda-based Haverford Group founder & chairman. “In my life I have created seven ILS structures and if Gibraltar had had the facility to list those, I would have moved them all from Cayman so we could get access to the EU,” he told me. “The last ILS I formed was in New York and had $US 1bn capital, so I am able to get together quite a few investors who will join me in what I am doing.”

And he emphasised: “Gibraltar will be able to compete with Cayman. There will be some who will question why Gibraltar is doing that and the stock exchange will need to demonstrate that there is support for such trade.

I am happy to invest in Gibraltar so that it forms a cornerstone of what we are doing – for example, something in the order of $US 50m equity would not be a problem. I am very bullish about this jurisdiction”, Byrne said. The FSC was “highly responsive” and “the best amongst regulators I have dealt with in 30 countries”, he declared.

Byrne has already invested €10m initial capital in Gibraltar by forming two years ago St Bernard Assure, a reinsurance and insurance operation, “but this easily could be €30m if needed and still more capital is available to meet any demand”.

Developing skills

Aon is the leading global provider of risk management, insurance and reinsurance brokerage, operating in 120 countries including Aon Insurance Managers (Gibraltar) Ltd, which “is recognised as a world-class financial services provider, managing nearly 30 insurance company facilities for some of the biggest companies in the world”.

AON globally is said to have introduced more ILS business than any other firm, and also is an ILS administrator. A company spokesman confirmed: “AON’s Gibraltar Office is actively developing the skills to be able to support the wider AON Group in transacting ILS business from Gibraltar.”

Mike Ashton, Gibraltar Finance insurance specialist, explained: “Over the last six months we have learnt that there is an appetite for choice within the EU for a new jurisdiction to structure and administer these insurance products. The capital markets are looking for very transparent regulatory processes and clear time lines in progressing their applications, which we can provide in Gibraltar.”

The FSC’s tailored ILS regulatory framework incorporates consultation before and during the application process, with a standard time to license of 4 weeks or, for a premium, a fast-track scheme in two weeks.

Local businesses attended the Monte Carlo Rendez-Vous in September and found “strong interest” in the Gibraltar ILS offering. “We believe that the implementation of Solvency II will bring new opportunities for an expanding European ILS market. Dublin has been involved with ILS transactions for some years and Malta has recently published its guidelines. Now, with our quality product, Gibraltar can quickly become a jurisdiction of choice within the EU for ILS transactions”, Ashton noted.