iSPV Proposals Mark New Phase for IOM Insurance Sector

The island has 214 registered insurers with a combined £58bn of assets under management and this seems set to continue growing.

The island’s insurance sector can largely be broken into four components: life assurance, insurance captives, domestic insurance and the exciting new area called insurance linked securities (iSPVs).

Why the Isle of Man?

Given the Isle of Man’s population of just over 85,000, the insurance market is not driven by domestic demand. Unsurprisingly, the significant growth over past 40 years has come from international business.

The Isle of Man’s insurance industry’s success began with the development of pragmatic and appropriate specialist life, pension and captive legislation. Whilst the growth began with the attractive regulation, the sector continued to thrive due to its demonstrably lower operating costs when compared to other offshore jurisdictions, as reflected by the prizes and accolades the island has won.

The Isle of Man is a key member of the International Association of Insurance Supervisors, a global organisation that provides guiding principles on insurance regulation to its members, a gold standard for them to meet.

Thus, not only does the Isle of Man offer a sound and globally accepted regulatory framework, but is an ‘open for business’ jurisdiction, allowing for capital efficient enterprise, with a simple low taxation regime and a cost base similar to that of the UK mainland. Insurers in the Isle of Man have been able to enjoy a low cost base without compromising on quality. The island is home to all the Big Four accounting firms, the top global brokers (Aon, Marsh and Willis) and top global law firms – just without the offshore price tag that many offshore jurisdictions demand.

The Life Market

The island’s life market comprises of some of the largest insurance names in the world, including Tokio Marine, Zurich Insurance, Friends Life, Old Mutual (through Royal Skandia), Axa, Canada Life and Clerical Medical.

The Isle of Man life market is one of the largest offshore life markets in the world with over £55bn in assets under management. The business underwritten in the Isle of Man has a truly global reach, writing policies in the Far East, the Middle East, Latin America, Africa and Europe. The life products underwritten include, not only singe premium traditional products, but a significant volume of investment portfolio bonds. More recently, as the complexity of the insurance markets has increased, mortality swaps and derivatives have been introduced and we would expect this trend to continue over the next few years.

Managing insurance businesses operating in such diverse markets is not an easy one and I am certain that each of the island’s life CEOs all qualify for the top tier of airline loyalty schemes. An additional challenge for the island’s insurance C suite and Board members is to qualify the number of opportunities and decide where to focus one’s efforts.

The growth of wealth in the developing economies is well covered by commentary in the international press, as is the development of the middle classes in these areas of the world. As history has shown us in developed nations, financial services and the products they supply expand as the wealth in the middle classes increases – essentially the financial services industry meeting the demand as the supply increases. With the Isle of Man insurers already having recognised brands in the countries where the demand is increasing, the future looks bright for the industry and its continued importance to the island’s economy.

Being in the right place at the right time is unlikely to be enough. Consumer needs are changing and changing at different rates in different areas of the world. In order to be successful and gain market share, it is necessary to keep up with the growing demands of consumers. However, not only do life platforms need to meet the needs of its customers but they also need to be offering products that are permitted in each market and are sold in a compliant, open and fair fashion. The change agenda has never been so multi-faceted, with not only changing markets and customer bases but an evolving regulatory environment.

The impact of regulatory change should not be underestimated as this is the single biggest influence on business transformation and strategy. Regulatory change, such as Solvency II, has led many global insurance organisations to adjust their group structures, operating models and product offerings to respond to a tighter regulated market. This in turn, is expected to trigger a significant uptake in deal-making and transactions across the sector as organisations re-evaluate which business are core and non-core.

Such growth opportunities have attracted new capital providers to the jurisdiction and global regulatory change has created chances to acquire strong reputable offshore businesses. This environment has already given birth to one transaction, being a private equity backed MBO of Royal London’s Isle of Man business now named RL360. This is unlikely to be the last transaction we will see in the Isle of Man…given the exciting road ahead.

iSPV

The life market is not the only sector of the local insurance market with an exciting future.

The Isle of Man will shortly release its new Insurance (Special Purpose Vehicles) regulations and guidance notes (iSPVs).The proposed framework will provide an environment that will attract insurance linked securities business (‘ILS’).

ILS is a global high growth market which, according to Guy Carpenter[1], now represents over 15 per cent of the global capacity for property catastrophe reinsurance alone with estimates that ILS premiums now account for over five per cent of all reinsurance premiums and over US$50bn of capital deployed.

ILS allows alternative capital providers, such as investment banks and hedge funds, to gain exposure to the returns (and risks) of the reinsurance markets. ILS take many forms, including catastrophe bonds, reinsurance derivatives, industry loss warranties, side cars, longevity swaps and reinsurance contracts with synthetic exposures.

Industry demand triggered the introduction of the regulations and the Island has continued to receive interest from several parties about the intended framework. Given the impressive stable of global insurers already using the Island as a home for their international insurance, the Insurance and Pensions Authority (‘IPA’) had been approached in the past with ILS opportunities but did not have the dedicated framework to execute this type of business in a structured and transparent way. Hence, the creation of an industry led working party to develop with the IPA a world class ILS framework.

Specific legislation was chosen for ease of use in order to make clear the regulatory requirements and tailored approach to regulation being adopted by the IPA.

Having dedicated ILS legislation demonstrates the Island’s desire to attract ILS business and makes clear what potential originators of such business may expect from the regulatory environment when choosing a location. ILS business is characterised by its sophisticated participants, collateralised/limited recourse-style of transactions, need for speed to market and need for clarity of cost etc. The ISPV proposals were designed to take account of these characteristics in a regulatory environment proportionate to the risks associated with ILS business and responsive to its particular needs. A key unique selling point will be a regulatory decision within five business days, assuming that the application is properly completed.

We know that on a recent jurisdiction feasibility study by parties seeking an ILS solution on our side of the Atlantic, the Isle of Man was the preferred choice, but unfortunately we missed out due to timing. Active marketing is now commencing and we expect the interest to be very positive, not just from our home market but also in attracting new insurers and capital providers to the Island.

Unlike many other jurisdictions recently releasing their ILS frameworks, the Isle of Man already has experienced specialist service providers ready to work on local ILS transactions, in terms of experienced ILS lawyers, administrators and insurance managers and accountants / tax advisors, with many having already worked with ILS in jurisdictions such as Bermuda.

It is critical in order to manage the execution risk associated with these complex transactions, that an ILS market meets all of the professional and infrastructure needs. Combined with a proven track record for service levels, as reflected in the loyalty of the companies that choose the Isle of Man for the home of their life or captive insurance business, the Isle of Man ILS offering is a strong and relevant one.

The Isle of Man has been managing captives for many years and is home to the captives of a number of global, FTSE 100 and 250 companies. The Island has built a reputation for effectively managing large and complex captives, being home to some of the largest captives in the world. This has been possible not only due to its service track record, the extent of specialist advisors based on the island and deep industry experience, but also the quality and proportionality of the regulation. From client feedback, not seeking Solvency II equivalence for captives and having an approachable regulator is proving popular with current users expanding their operations, and new ones considering a move to the island.

With the recent growth in the captive market, a new market leading ILS framework and significant life market opportunities, the insurance industry in the Isle of Man is entering a very interesting and exciting period.

 

[1] Trading Risk magazine