Special Purpose Insurers (SPIs) have become the fastest growing type of Bermuda market insurer as demand for catastrophe bonds soars. And Bermuda has quickly seized 20 percent of the global catastrophe bond market. Amid increasing demand, that share appears set to grow.

Leslie Robinson, Assistant Director, Insurance Licensing and Authorisation, at financial regulator the Bermuda Monetary Authority (BMA), revealed that the Island is on track to add even more SPIs this year than the 23 it licensed in 2011.

Speaking at a session entitled 'SPIs – An Emerging Opportunity', Ms Robinson told delegates that the Authority had licensed 10 new SPIs so far this year. Five of them were formed in May as sponsoring reinsurers built up capacity for the hurricane season.

The SPI classification was introduced in Bermuda in 2010 and provides a sound legal and regulatory framework for vehicles used for collateralized reinsurance products, including cat bonds, industry loss warranties and sidecars.

SPIs are required to meet several key criteria, allowing the BMA to regulate them less stringently than other insurance entities, the first of which is that they are fully collateralized, meaning that for every dollar of risk, there is a dollar of capital. Other requirements include that their investors are sophisticated, that the SPI's purpose is specific, that there is limited recourse, and that it meets the Authority's standards for transparency and disclosure.

She added that the BMA had almost halved SPI fees from $11,600 to $6,000 last year, to sharpen the Island's competitiveness in the ILS market.

Fellow panelist Sean McCarty, Managing Director of Aon Benfield Investment Banking, outlined the size of the cat bond market, estimating that there have been $43 billion in placements since 1996 and more than $15 billion worth were active. Bermuda had a 20 percent share of the cat bond market and "most, if not all" of the sidecar issuances, he added. Jason Carne, Partner, Insurance, KPMG Bermuda, said prior to the enactment of the SPI legislation, the business went elsewhere, but Bermuda now has the edge.

He said Bermuda has unmatched insurance expertise, including auditors and attorneys knowledgeable in the industry. "Bermuda has the deepest infrastructure," Mr. Carne said. "When things don't go according to plan, then you need expertise in place to deal with it."

Brad Adderley, Partner at international law firm Appleby, also opined that Bermuda was now a superior cat bond jurisdiction to those where deals were taking "months" to go through. "In Bermuda, the process is smooth and quick," Mr. Adderley said. "Speed to market is very important."

Although it might be difficult to win business from sponsors who traditionally placed cat bonds elsewhere, Mr. Adderley felt Bermuda also had the edge because of the Island's reinsurance market and related expertise.

Originally published in Bermuda Insurance Update, July 2012

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