Insurance Linked Securities (ILS)
Insurance-linked securities (ILS) are financial instruments whose values are driven by insurance loss events typically hurricanes, windstorms and earthquakes and are the result of the process of convergence between the capital markets and the insurance industry. Catastrophe bonds (or cat bonds) are a segment of the ILS market.
This asset class has developed rapidly in recent years with investors attracted to ILS as their returns are largely uncorrelated with those of the financial markets. The total volume of catastrophe bonds and ILS issued during 2013 exceeded US$7.5 billion and by the end of 2013 there was an all-time high of US$20.5 billion of outstanding catastrophe bonds and ILS.
Gibraltar has strong ambitions to become the Insurance Linked Securities (ILS) jurisdiction of choice within the European Union. Gibraltar's Insurance Companies (Special Purpose Vehicles) Regulations 2009 will be the primary legislation for Gibraltar to enter the ILS market and its 2001 protected cell companies legislation will be an attractive part of Gibraltar's ILS offering. Gibraltar is in the same time zone as the majority of western and central Europe and is easily accessible to European sponsors. A new airport terminal opened in 2012, and Malaga airport a short drive along the coast serves numerous European cities.
Gibraltar has a track record with the capital markets. In the late 1990s Gibraltar became a repackaging domicile for securitisation issues pioneered by a major European investment bank using a Gibraltar Special Purpose Vehicle (SPV) and quickly followed by another bank with a 15 billion euro multi-issue secured note programme. Gibraltar became attractive for such SPVs due to its status as an English common law jurisdiction.
The introduction of Solvency II from the beginning of 2016 is likely to create greater opportunities for onshore ILS offerings within the European Union. Gibraltar aims to provide an alternative domicile for European sponsors that are concerned about establishing offshore SPVs or those who would prefer to structure their ILS offerings within the European Union. It will be increasingly important for European sponsors to ensure that relief provided by SPVs is recognised under Solvency II.
Whilst always robust Gibraltar’s financial services regulator, the FSC, fully understands the speed to licence for a SPV required by the capital markets for ILS offerings. The ability to be able to engage directly with an insurance regulator is a key factor in the choice of an insurance domicile.