The UK budget announcement on 18th March 2015 to explore options for insurance linked securities (ILS) to be domiciled in the UK is a natural choice given the breadth of the industry capability, combined with access to the capital markets and the necessary professional services firms.
ILS is an excellent instrument to mutualise risks. To date ILS has typically been used to mutualise well modelled natural catastrophe risk, such as hurricanes and earthquakes, and has put downward pressure on premiums as new investors have entered the market. Finding a way to put this new capital to work to insure new risks, in emerging economies, would be good news for insurers, the capital markets and society at large. One could argue that insuring against cyber terrorism will require a new approach and ILS may well play an important role.
As always the devil will be in the detail and we look forward to seeing the draft corporate and tax laws for domiciling ILS in the UK.
BNY Mellon acts as a trustee and paying agent, and collateral agent on cat bonds which are risk-linked securities that transfer a specified set of risks associated with hurricanes or earthquakes from an insurer or a nation state, to investors. BNY Mellon was trustee on 68 per cent of all cat bonds in 2012. To view a recent report by BNY Mellon on cat bonds, “The disaster gap: How insurers and the capital markets can harness big data to close the gap", please click here. The report includes contributions from some of the world's leading experts on cat bonds.