Bermuda is playing a key role in the evolution of the re/insurance market by encouraging the growth and development of insurance securitisation or insurance-linked securities (ILS).This from corporate attorney Lynda Milligan-Whyte, writing in the September Issue of Offshore Investment Magazine.Ms Milligan-Whyte, of Apex Law Group, notes this is being done via Bermuda-registered special purpose insurers covering property, casualty and more recently life insurance risk.“Insurance securitisations have complemented traditional reinsurance, adding to the capital available to insurers as well as contributing to premium price competitiveness,” Ms Milligan-Whyte writes. “It has also attracted a new breed of investor.“According to the World Economic Forum/Swiss Re2, as of 2012 year-end, insurers and reinsurers made up about five percent of all insurance-linked securities investors representing a decline from 20 percent in 2007.”As insurers have decreased their share in the overall investment in the ILS market, hedge fund and asset managers and pension funds have increased their participation in ILS investments, the attorney says.“The insurance securitisation process involves two elements: the first element is the transformation of underwriting cash flows into tradable financial securities; and the second element is the transfer of underwriting risks to the capital markets through the trading of those securities. In essence, instead of an insurance company transferring its underwriting risks to a reinsurer, the underwriting risks may now be transferred to the capital markets.“The reasons behind this development are twofold: firstly, it is one of capacity: there is a risk of huge catastrophic losses which could severely impair the capital of the property and casualty insurance industry; secondly it is one of investment: investment in catastrophic exposures (through catastrophe bonds) should be desired by the capital markets because it will provide a high yield relative to the underlying risk.”Ms Milligan-Whyte continues: “Many such Bermuda-based SPIs have also sought to list their insurance-linked securities on the Bermuda Stock Exchange.An ILS product used for transferring catastrophe risk to investors is the sidecar, which became very popular in the aftermath of Hurricane Katrina.“Sidecars are used mainly by reinsurers following major catastrophes to add risk-bearing capacity in periods of increased market stress. Sidecars are SPIs through which reinsurers cede premiums associated with a book of business to investors who place sufficient funds in the SPI to ensure claims are paid if they arise.“In contrast to cat bonds, which are structured as long term instruments covering a broad array of perils and geographic locations, sidecars are tactical instruments of limited duration during a hard market.”Ms Milligan-Whyte says the SPI licensing and supervisory regime implemented by the Bermuda Monetary Authority (BMA) is designed to provide a speedy yet transparent system that takes into consideration the nature of the risk, the sophistication of the parties and the fully-funded nature of the structure.”