Guernsey: Insurance Linked Securities – Turning Disaster Into Opportunity

Last Updated: 19 March 2014
Article by Christoper Anderson

Most Read Contributor in Guernsey, September 2018

Christopher Anderson, a partner at Carey Olsen in Guernsey, takes an in-depth look at ILS.

The recent disastrous floods in the UK were caused by a succession of European windstorms (the latest being Windstorm Ulla). While devastating for those unfortunate enough to be affected by the floods, European windstorms and other natural disasters can provide a unique opportunity for others to invest in the pure insurance risk associated with the chance occurrence of natural catastrophes. Such investments are often structured through a somewhat esoteric investment called an insurance linked security (ILS). These investments involve the convergence of both investment and insurance expertise. For that reason, it is perhaps not surprising that Guernsey has seen an increase in ILS transactions in the last year or so. This article considers why Guernsey is such an attractive jurisdiction for ILS.

What is ILS?

An ILS is an instrument that provides investors with the opportunity to obtain exposure to pure insurance risk, usually over a short timeframe. Pure insurance risk (which depends on whether or not an uncertain future event occurs) is often entirely uncorrelated to traditional investment assets. For that reason, an ILS can be avery attractive investment during times when traditional investments (eg, the stock market and interest rates) are providing poor returns.

The classic example of an ILS is a catastrophe reinsurance bond. In a cat bond, investors lend money to an special purpose vehicle (SPV) in the form of bonds that are often listed on a reputable securities exchange. The SPV writes an insurance or reinsurance contract (or even an International Swaps and Derivatives Association (ISDA) documented swap) under which it receives a premium in return for agreeing to provide cover to specified assets in respect of a particular risk (usually a natural catastrophe such as European windstorm) for a specified period (usually a year). If the windstorm season passes without incident, investors receive back their principal plus the stated coupon in full, which is funded out of the unspent premium received by the SPV. If not, investors may receive a reduced coupon or even lose some or all of the principal amount of the bonds they acquired.

Since they are often listed securities, cat bonds are available for investment to a wide range of investors. In the current economic climate, an increasing number of specialist investment funds (some established in Guernsey) are targeting ILS as an asset class. However, those funds are not limiting their investments to cat bonds. Instead, these highly sophisticated investors have established a number of "private placement" structures in Guernsey to obtain more direct exposure to the risk. Those private placement structures typically involve the establishment of an SPV, which is owned and capitalised by the fund. The SPV directly writes the relevant risk, often through a reinsurance contract or an ISDA documented swap. Since there are fewer parties involved and no listing requirements to meet, the structure involves lower frictional costs than a cat bond. As a result, the fund stands to make a gain in excess of the amount of the coupon stated on a cat bond if the risk does not eventuate.

Why Guernsey?


Guernsey is the leading European captive domicile and the fourth largest such domicile globally. It has been providing captive expertise for almost 40 years, and yet continues to show remarkable growth—there were 737 international insurers licensed in the island at the end of December 2012 compared with 687 a year previously. All of the major insurance brokers are represented, as well as a number of independently owned insurance managers.

Insurance regulation

Since the SPV in an ILS transaction is accepting risk on to its balance sheet, it may require to be regulated if it is conducting insurance business. Where the risk is accepted under an ISDA documented swap, on the other hand, such regulation may not be required. It is worth noting that there is no prohibition on a Guernsey-licensed insurance company entering into an ISDA documented swap. Indeed, a large number of transformer transactions have been conducted in Guernsey over the last 10 to 15 years.

In many jurisdictions, obtaining authorisation to conduct insurance business can be a lengthy process. However, in Guernsey where the business is to be transacted through a protected cell of an already established Guernsey protected cell company, the necessary approval can usually be obtained in a matter of days. A number of insurance managers in Guernsey have already established protected and incorporated cell companies with cells that are available to third parties that wish to utilise them in this way and many ILS transactions have already been conducted through Guernsey cell companies. SPVs utilised in ILS transactions are invariably fully funded.

Accordingly, the Guernsey Financial Services Commission (GFSC) is able to take a pragmatic approach to solvency requirements. Indeed, in some circumstances a self-certification process may be available for SPVs that meet certain specified criteria. If the SPV meets the eligibility criteria, the local Guernsey appointed insurance manager can obtain the necessary regulatory permission without having to wait for the GFSC to respond to an application.

The speed and certainty with which this process provides gives Guernsey a key advantage over many competitor jurisdictions.

Funds industry

Guernsey has a world-class reputation as an investment fund domicile. As at Q3 2013, the net asset value of funds under management and administration in Guernsey was £267 billion. As noted above, a number of those funds invest in ILS products. For example, Carey Olsen advised on the establishment of DCG Iris Limited, a London-listed and Guernsey-registered closed-ended investment scheme that raised £40 million in 2012 to invest in ILS. Carey Olsen is also advising on the establishment of another listed fund that will invest in Lloyds' capacity through the cell of a Guernsey protected cell company. There are a number of other such funds and, for practical reasons, an investment fund already established in Guernsey is likely to use an SPV located in that jurisdiction, all other things being equal. However, the growth seen in Guernsey ILS transactions has largely been due to the proximity of fund managers in London and Zurich that are familiar with Guernsey as a well regulated international finance centre. To them, Guernsey's combination of both insurance and investment fund expertise can be compelling.


Although traditionally cat bonds have been launched through the Caribbean jurisdictions, Guernsey is well placed to accommodate this business, too. Guernsey's dominance of the listed sector is well documented—it remains the domicile of incorporation for more non-UK entities listed on the London Stock Exchange than any other jurisdiction globally. Indeed, the establishment of a Guernsey holding company in order to facilitate the IPO of an overseas trading group on the London Stock Exchange is common.


Guernsey has recently introduced the continental legal concept of a foundation. Many SPVs used in ILS transactions must be "orphaned" and the foundation is an additional tool that can be used to achieve this, instead of the traditional common law trust. One of the key benefits of using a foundation instead of a trust is that its legal basis is often more readily understood in continental jurisdictions where the concept of a trust is unfamiliar.

Express company formations

Since the introduction of the online Guernsey Companies Registry in 2008, it has been possible to form a Guernsey company within a very short period of time. Standard formations are guaranteed to be turned around by the registry within 24 hours (but, in practice, are often approved the same day). For a slightly higher registration fee, four-hour and even 15-minute formations are possible. It is not yet clear what impact this season's flooding in the UK will have on returns to investors in ILS transactions. However, what is clear is that the ILS has become a fixture of the investment and insurance landscape demonstrating the agility and value that a product created through the convergence of the insurance and investment sectors can have. Its strength in both sectors and the pragmatic approach of the regulator should mean that Guernsey's position at the centre is assured.

An original version of this article was published in Captive Insurance Times, February 2014.

For more information about Guernsey's finance industry please visit

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

Similar Articles
Relevancy Powered by MondaqAI
Carey Olsen
In association with
Related Topics
Similar Articles
Relevancy Powered by MondaqAI
Carey Olsen
Related Articles
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of

To Use you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions