Record-Setting Year For SPIs
The string of catastrophes in the first half of 2011 that caused so many insurer losses also spurred the possibly record-setting formation of special-purpose insurers [SPIs] in Bermuda with 17 formed so far this year, industry journal “Property Catastrophe 360″ reports today [Dec.7].
The majority of those formations have been created for issuing catastrophe bonds, according to the Bermuda Monetary Authority [BMA].
SPIs are fully funded insurance entities normally formed for a single transaction; they enable insurers to raise capital by transferring risk for major natural perils like hurricanes or earthquakes via capital market vehicles, typically by issuing cat bonds to third parties.
The Bermuda Stock Exchange [BSX] in September announced that the value of insurance-linked securities [ILS] it lists has doubled in the past year, surpassing the $2 billion mark for the first time. The Exchange has been striving to attract such ILS deals since the BMA in 2009 created the new SPI class of insurer and regulations conducive to the formation of such entities in Bermuda.
The Embarcadero catastrophe bond in July took the number of listed securities on the BSX to that 17 figure and the listed value to $2.1 billion. The $150 million Embarcadero cat bond was approved by the California Earthquake Authority through an SPI in Bermuda, Embarcadero Reinsurance Ltd.
The momentum is driven largely by the BMA’s revised regulations, which in late 2009 established a new designation for “special-purpose insurers” as part of its supervisory scheme.
The new framework is “very favuorable, and long term it will work to the advantage of Bermuda to have this in place,” said Paul Schultz, president of Chicago-based Aon Benfield Securities Inc., which arranged the first two Bermuda-based deals brought to market aftere Bermuda revamped its rules.
Under the previous framework, special-purpose insurers would have been treated as a Class 3 reinsurer, and subject to high capital requirements and other regulations that were generally viewed as “burdensome” because the “vehicles are fully collateralised, therefore [they] have a very low risk of insolvency,” said Charles Collis of Bermuda law firm Conyers Dill & Pearman.
Now, lower capital requirements and other modifications have made the designation more efficient and attractive for potential sponsors, he said. In addition, the regulation’s speed-to-market features also are very appealing and most special-purpose insurers can be formed in less than a week, legal experts say.
According to the BMA, which recognises that capital market solutions have become increasingly important to the insurance industry, numerous special-purpose insurers have been formed since the class became effective.
In addition, experts say if there is a market-changing event, such as a significant catastrophe, the Bermuda market anticipates ther
Earlier this year, BMA CEO Jeremy Cox said the island was actively encouraging this “new breed of reinsurance …” because Bermuda is not going to see a lot of the same traditional formations as in the past.
The formation of sidecars is another example of the type of financial forward-thinking that is characteristic of Bermuda, “which has always been on the forefront of creative products,” says Frederick J. Kohm Jr., a partner in the Economic Advisory Services division at advisory-service Grant Thornton LLP in Philadelphia.
Sidecars are a type of special-purpose vehicle that became popular as a solution in 2005 after the roar of Hurricanes Katrina, Rita and Wilma caused a reinsurance capacity shortfall.
Early this year, Bermuda’s Lancashire Group, Validus and Alterra announced sidecars formed primarily for property catastrophe and retrocession business.
While sidecars help address short-term capacity gaps, in the long term they “tend to do the market a little disservice, because it means the prices are never correct,” says Julia Mather, head of advisory-service Miller Bermuda. “You have all this extra capacity, so even if people do leave the market, the extra capacity comes straight in, and so there’s not the correction you would have expected.”
