London sets up catastrophe bond task force

[LONDON] Britain has created an expert group to put forward proposals on how the country can become a centre for catastrophe bonds, used by insurers as a hedge against disasters and other costly events from hurricanes to lottery jackpots.

The British government wants to tap into the fast-growing US$22 billion market for catastrophe bonds as low-tax hubs such as Bermuda steal a march on London.

The government said in its most recent Budget that it wanted London, one of the largest centres for the world's US$575 billion reinsurance market, to become a catastrophe bond centre. "A task force has been set up, we are looking to have something produced by the autumn," said Barry Le Page from the secretariat of industry body the London Market Group (LMG).

The working group includes lawyers and fund managers as well as insurers, Le Page said, and would look at changes Britain needs to make to compete with offshore centres such as Bermuda.

The catastrophe bond market has seen double-digit annual growth since the financial crisis, as yield-hunting investors seek out government bond-beating returns.

Catastrophe bonds are issued by insurers as a hedge against a catastrophe, often as a cheaper or more flexible alternative to reinsurance. A record US$8 billion of new deals were launched in 2014.

But a report last year by the LMG and Boston Consulting showed London's share of the global reinsurance market is declining while Bermuda has shown a rapid ascent.

The report highlighted alternative reinsurance products such as catastrophe bonds as areas of growth.

Offshore British territory Bermuda has built up expertise at structuring the special purpose vehicles needed to convert insurance products into these capital market instruments, as it offers a more attractive regulatory environment.

Britain would need to make similar regulatory changes to compete, industry observers said, while Bermuda also offers tax advantages which the new British Conservative government may find hard to replicate. "What the government's appetite may be for this, set against a background of continuing austerity and spending cuts, will have to be seen," said lawyers at Clyde & Co in a note.

Britain is also competing with Gibraltar, which stole a march by launching its first insurance-linked security last month. But London already has the world's biggest speciality insurance market, Lloyd's of London. "It's a really good idea for London," said John Seo, managing principal of Connecticut-based Fermat Capital Management, which has a presence in Bermuda, adding he would open an office in London if it developed as a catastrophe bond centre. "If the nuts and bolts of the market are there, it becomes compelling."

REUTERS