Bermuda’s move to create a supervisory regime to attract capital market structures into its established reinsurance market will have limited impact in the catastrophe bond business, industry professionals say.
The Cayman Islands — the traditional offshore center for issuing catastrophe bonds — will likely remain at the center of the business by feeding off its track record of successful launches.
“Bermuda has long been respected as an offshore insurance center with a quality and respected regulatory regime,” says Earl Zimmerman, partner in the Insurance Transactional Group of Sutherland Asbill & Brennan LLP in New York. “But when you do a fully funded cat bond with a three-year life, for example, the question is whether you need that level of regulatory rigor.”
Earlier this week the Bermuda Monetary Authority announced that it was creating a new regulatory regime for Special Purpose Insurers (SPIs). The SPI designation will allow the creation of special purpose, single transaction or single customer insurance
companies to take on risks.
The key for the insurance-linked securities industry is that SPIs will be able to avoid Bermuda’s regulatory solvency margin. Zimmerman says, “Prior to the SPI legislation, Bermudian reinsurers had to have a solvency margin, in other words assets in excess of liabilities, of at least $120,000 and up to $1 million.”
He added that now a Bermudian SPI can be created with a solvency margin of $1, a key for catastrophe bonds and other structures like side cars where the reinsurance exposure of the SPI is fully funded.
But the creation of the SPI designation is not enough to supplant the Caymans role in the catastrophe bond market, other argue.
“Bermuda’s proposed reforms simply try to emulate the existing Cayman Islands model” says John Dykstra, an attorney for the Cayman Islands offices of international law firm Maples and Calder. “Our clients indicate that the Cayman Islands still offers a regulatory regime that is more flexible, responsive and cost-effective than the regime offered by Bermuda.”
Dykstra — who heads up the firm’s catastrophe bond practice — argues that significant numbers of cat bonds will not begin being issued out of Bermuda.
“Client feedback indicates that Bermuda’s reforms are too little, too late,” Dykstra says. “The level of professional expertise found in the Cayman Islands cannot be matched by any other offshore jurisdiction.”
Maples and Calders has acted on more than a hundred catastrophe bond transactions, and Dykstra adds that Caymans regulators have been overseeing catastrophe bond transactions since the start of the market.
“Investors and rating agencies have done extensive due diligence and have a great deal of confidence in the Cayman Islands model,” he adds.
Zimmerman explains that whether Bermuda can catch up with the Cayman cat bond dominance will remain to be seen.
“The question is whether this is enough to overcome the tendency of cat bond sponsors to favor the Cayman Islands. It may not be enough for Bermuda to simply match the Cayman regulatory regime,” he says
The Bermuda SPI designation may — however — allow the island nation to take advantage of a need for additional capacity through the creation of reinsurance side cars.
Industry professionals have argued that if another capacity crunch is experienced in the future, side cars will be the the vehicle of choice for taking advantage of pricing since the cost of creating new reinsurance companies is too high.
“Bermuda trends towards the creation of side cars,” Zimmerman says. ”It’s more in the tradition Bermuda of taking on risk and then shutting it off.”
