U.K. ILS Regulations. IRLA Breakfast Briefing, December 8, Andy Palmer Swiss Re Capital Markets

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1 U.K. ILS Regulations IRLA Breakfast Briefing, December 8, 2017 Andy Palmer Swiss Re Capital Markets

2 Disclaimer Swiss Re Capital Markets Limited ( SRCML ) (Financial Services Register Number , VAT Registration number ) of 30 St Mary Axe, London, EC3A 8EP is a company authorised and regulated in the conduct of its investment business in the U.K. by the Financial Conduct Authority and is entered in the Financial Services register. The Financial Conduct Authority website contains a wide range of information of specific relevance to U.K. customers and provides access to the Financial Services register. This information is not intended for retail clients. Persons dealing with SRCML outside the United Kingdom are not covered by all the rules and regulations made for the protection of investors in the United Kingdom and may not have the right to claim through the United Kingdom s Financial Services Compensation Scheme. This document is confidential and proprietary to us and is solely for your use and is not intended for any further dissemination. This document remains our property and must be returned to us on request and any copies you have made must be destroyed. Nothing in this document should be construed as legal, tax or investment advice. Unless otherwise agreed in writing, SRCML and its affiliates ( Swiss Re ) are not acting as your financial adviser or fiduciary. This document is for information purposes only and does not constitute an invitation or inducement or an offer or commitment, a solicitation of an offer or commitment, or any advice or recommendation, to conclude any transaction. While information herein has been obtained from sources believed to be reliable, we do not represent it to be accurate or complete. The information contained herein includes illustrations, estimates and projections and involves significant elements of subjective judgment, assumptions and analysis. Any views or opinions (including illustrations, estimates, statements or forecasts) constitute our judgment as of the date indicated and are subject to change without notice. No representation is made as to the accuracy of such illustrations, estimates or projections or that all assumptions relating to them have been considered or stated or that such projections or returns will be realised. The returns or performance results may be lower than estimated herein. The information contained herein does not purport to contain all of the information that may be required to evaluate such solutions and you are encouraged to conduct independent analysis of the data referred to herein. We do not undertake to update this document. Before you enter into any transaction, you should ensure that you fully understand the potential risks and rewards of that transaction and you should consult with such advisers as you deem necessary to assist you in making these determinations. Neither of us should rely on any representation or undertaking inconsistent with the above paragraphs. Notwithstanding the confidential nature of this document and its contents, we may disclose to any and all persons, without limitation of any kind, the tax treatment and tax structure of the transaction(s) contemplated herein and all materials of any kind that are provided to you relating to such tax treatment and tax structure. However, any such information relating to the tax treatment and tax structure of the transaction(s) shall be kept confidential to the extent necessary to comply with any applicable federal or state securities laws. SRCML may not be authorised to arrange insurance or reinsurance products in your jurisdiction, and if any such solutions are required an appropriate entity within the Swiss Re group would arrange or provide such product. 2

3 Agenda 01 Introduction to the ILS Market 02 The U.K. ILS Regulations (Risk Transformation Regulations 2017) 03 Opportunities for the London Market 04 The Challenges 3

4 01 Introduction to the ILS Market

5 Introduction to the ILS Market The Role of Swiss Re and Swiss Re Capital Markets Sponsoring Swiss Re Capital Markets is a leader in the insurance-linked securities market, having underwritten over USD 30bn in cat bonds since its inception in the late 1990s Swiss Re is the largest sponsor of cat bonds historically with more than USD 8bn issued Transforming Structuring Distribution Secondary Trading Investing Swiss Re Cat Bond Indices 5

6 Introduction to the ILS Market Swiss Re: A History of Market Innovation and Cat Bond Firsts 1997 First Industry Index Cat Bond 1997 First Parametric Index Cat Bond and First 10 Year Term Cat Bond 2003 First Mortality Risk Life Securitisation 2010 First Longevity Cat Bond 2012 First Cat Bond to Combine Two Different Sponsors Risks 2012 First Combined Nat Cat and Life Cat Bond 2013 First Combined Reinsurance / Insurance Trigger 2016 Introduction of All-Natural Perils 2017 Development of First Pandemic Transaction for the Developing World 6

7 Introduction to the ILS Market Why does the ILS Market Exist? ILS provides investors with a source of returns with low correlation to financial markets, representing an opportunity for diversification Dedicated Investors: Includes dedicated cat funds, client-facing sidecars Multi-Strategy: Includes asset managers, hedge funds Real Money: Includes insurers, endowments, pension funds, mutual funds, banks 7

8 Introduction to the ILS Market Why does the ILS Market Exist? 2016 U.S. Pension Plan Assets (AUM): USD 25.1 trillion Reinsurance capital: USD 390 billion 2 Of which: Traditional reinsurance: 81% Alternative capital: 19% 1 Source: OECD Pension Markets in Focus, 2017, data as of 31/12/ Source: Swiss Re Institute, Swiss Re Sigma No 2/2017 8

9 Introduction to the ILS Market A Potted History 2017 Largest ever issuance of cat bonds 2015 Rated reinsurance vehicles Bermuda Start-ups 1996 Cat Bonds Late 1990s Dedicated ILS Funds 2014 Hedge Fund Re 2013 Sidecars v Collateralised Re takes off 2005 Sidecars v1 9

10 Introduction to the ILS Market Market Segmentation and Size Total ILS capacity being provided directly by the capital markets is estimated to be nearly $80 billion as of mid-2017 USD bn H17 Collateralised re, sidecar and ILW Cat bonds Traditional capital Source: Swiss Re Institute and Swiss Re Capital Markets, November

11 Introduction to the ILS Market Where are we today? The ILS market operates where there are relatively low barriers to entry: easy-to-model perils, relatively high cost of capital, short tail Historical Peril Split Historical Non-Cat Peril Split USD 84bn USD 6.8bn Source: Swiss Re Capital Markets, November A Cat Bonds only Nat Cat Others Extreme Mortality Extreme Morbidity Auto Event Cancellation Industrial Accident Pandemic Credit Reinsurance Longevity Divergence 11

12 Introduction to the ILS Market Expanding Access to Other Lines of Business Run-off Engineering Product Liability Longevity Agro Aviation & Space Other Nat Cat Offshore Marine Manmade Property Peak Peril Nat Cat Extreme Mortality 12

13 02 The U.K. ILS Regulations (Risk Transformation Regulations 2017)

14 The U.K. ILS Regulations Importance of the London Market for the U.K. economy The London market contributes substantially to the U.K. economy, representing around 13% of the U.K. financial services sector s direct GDP contribution GBP bn Direct GDP contribution Indirect GDP contribution Induced GDP contribution Total GDP contribution Source: London Matters, 2017, data as of 31/12/

15 The U.K. ILS Regulations The London Market s Current Size The London market needs to stay ahead of the curve in order to continue growing Market Size Growth Rate Singapore USD 8bn +4.0% Switzerland USD 31bn +0.6% Bermuda USD 39bn +1.0% London USD 91bn -0.3% Source: London Matters, 2017, Gross Written Premium, commercial insurance and reinsurance in 2015, USD bn 15

16 The U.K. ILS Regulations Overview The government is committed to working with the insurance industry to help strengthen the sector s contribution to the U.K. economy and enhance the U.K. s position as a leader in a truly global industry Regulatory Framework Creation of a regime for establishing Protected Cell Companies ( PCC ) Supervisory Framework Dual supervision regime with PRA and FCA Tax Framework Corporate tax exemption Withholding tax exemption for foreign investors Source: HM Treasury, Regulations implementing a new regulatory and tax framework for Insurance-Linked Securities: response to the consultation 16

17 The U.K. ILS Regulations Timeline Establishment of the ILS taskforce First Consultation Second round of Consultations Conversion into law 2015 Q1 Q2 Q3 Q Q1 Q2 Q3 Q Q1 Q2 Q3 Q4 March 18, 2015: As part of Budget 2015, plans are announced to transform London into a leading hub for global ILS business November 29, 2017: Adoption into law of the Risk Transformation Regulations

18 The U.K. ILS Regulations Typical ILS Structure Refresher Sponsor Risk Transfer Contract Premium Payout SPV / PCC Collateral Trust Securities Proceeds Interest Payment Return of Remaining Principal Investors Investments Investment Return Collateral 18

19 The U.K. ILS Regulations Regulatory Framework A new regulated activity of Insurance Risk Transformation has been introduced into the Financial Services and Markets Act (2000) Cedant 1 PCC Core (MISPV) Cell A e.g. Notes, Pref Shares Cell B Qualified Investors Cedant 2 Cell C Cedant 3 Cell D Source: The Risk Transformation Regulations 2017 An ISPV which takes on more than one contract for risk transfer from one or more cedants is referred to as a multi-arrangement insurance special purpose vehicle (MISPV). (PS26/17, PRA) 19

20 The U.K. ILS Regulations Supervisory Framework Application Process (M)ISPVs are subject to authorisation and supervision by the PRA and the FCA Pre-application discussions with early feedback (M)ISPV Application Form Application Form for individuals Documentation Requirements Scope of Permission Ongoing cooperation with EEA cedants Supervisory Authorities For straightforward proposals supported by good quality documentation, the PRA envisages a 6-8 weeks period to reach a determination Source: Supervisory Statement SS8/17, PRA 20

21 The UK ILS Regulations Supervisory Framework Requirements of ISPVs Ongoing supervision by PRA and FCA is proportionate and risk-based Senior Insurance Managers Regime (SIMR) requirement Fit and proper requirements for shareholders or members with a qualifying holding (10% or more) Fully funded requirement according to Solvency II Source: Supervisory Statement SS8/17, PRA 21

22 The U.K. ILS Regulations Tax Framework The government recognised the need to be internationally competitive with a tax framework that recognises the nature of insurance risk transformation No corporation tax is applied to the insurance risk transformation activity of qualifying transformer vehicles No withholding tax on payments of interest or dividends to investors Source: The Risk Transformation (Tax) Regulations

23 03 Opportunities for the London Market

24 Opportunities for the London Market Bringing the ILS market to the Next Step of Innovation and Growth London is the biggest global centre for insurance risk, with USD 66.7bn of gross premium written and USD 24bn managed by London in 2015 London offers a unique ecosystem of financial services and is one of the most attractive financial centres globally The London market employs 35,000 people in London, representing 13% of those employed in the City Source: London Matters,

25 Opportunities for the London Market Attracting New Talent and Increasing Diversity Innovation can enhance the attraction of new talent to the industry, with the potential to increase diversity in the workforce 2% 3% 6% 89% UK EU Non-EU 27% 15% 20% 35% Below Above 60 Percentage of U.K. and non-u.k. employees in the London Market Age brackets represented in the London Market Source: London Matters,

26 Opportunities for the London Market The Protection Gap London expertise needs to be leveraged in order to help close the protection gap both in mature and developing markets ILS can play a significant role in this Source: Swiss Re Institute, Swiss Re Sigma No 2/2017 Insured losses Not insured 10-year moving average insured losses 10-year moving average total economic losses 26

27 04 The Challenges

28 The Challenges Potential Hurdles London is not a tested ILS platform some deals will need to go through the system in order to increase efficiency High requirements in terms of documentation and amount of effort necessary for incorporation Slower (initially) and more costly ancillary services, with expertise in the field to be developed Requirement to be fully funded according to Solvency II Lack of speed and certainty in the approval process, fundamental for competing with other jurisdictions 28

29 Q&A

30 Contact Information Contact: Andy Palmer Deputy Head of ILS Structuring Swiss Re Capital Markets, London

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