Cat bonds and Brexit: Three issues to watch

Britain's leaving the EU will have a large impact on financial markets. Even ILS and cat bonds will be affected. The asset class has, however, demonstrated its fundamentally uncorrelated nature during the turmoil on the equity markets after the referendum to the benefit of its investors when traditional portfolios have been negatively affected.

Finance, banking and insurance are among the sectors that face challenges after the Brittish referendum on EU membership. The uncertainty has been clearly demonstrated in the turmoil on equity markets in the past days. While effects on the global market for insurance linked securities and cat bonds are likely to be smaller, there are certainly issues to mind in the coming months. Like most other sectors, the consequences are difficult, if not impossible, to foresee. What is certain, though, is that uncertainty itself will affect the market.

1Relocation and institutional change will characterize the coming years. A number of global financial institutions have signalled their intent to relocate at least parts of their UK business to remain within the EU single market. Among these institutions we are likely to find actors within the ILS field.

2Actors on the UK financial market faces regulatory uncertainty in the coming years. Actors and ILS products are driven and governed by a number of European directives, such as the Solvency II directive, the Basel II Rules and the MiFID directives. As the validity of these and other directives will be contingent on the negotiations between the UK and the EU, the regulatory climate will likely remain uncertain for a few years.

3Ultimately, the institutional changes and the regulatory climate will depend on choices made by the British government, such as wishing to retain existing European regulation or to develop a proprietary regulation to exploit the opportunities of a less regulated market. Interestingly enough, Bermuda has already clarified the autonomous validity of European financial regulation in the domicile, independent of the outcome of the British referendum.

As the coming negotiations could affect the possibility to offer funds domiciled or managed by managers in the EU in the UK, as well as the possibilities for UK managers to offer management services on the European market, the development of these and other issues must be carefully followed.

For the time being, I am confident that the regulatory climate of the EU in a stable domicile such as Sweden, benefits Entropics.

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