Guernsey: Insurance Linked Securities – Turning Disaster Into Opportunity

Last Updated: 19 March 2014
Article by Christoper Anderson

Most Read Contributor in Guernsey, November 2017

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.

In association with
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
Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:
  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.
  • Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.
    If you do not want us to provide your name and email address you may opt out by clicking here
    If you do not wish to receive any future announcements of products and services offered by Mondaq you may opt out by clicking here

    Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

    Use of

    You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). 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 & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


    Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd 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 or performance of information available from this server.

    The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


    Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

    • To allow you to personalize the Mondaq websites you are visiting.
    • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
    • To produce demographic feedback for our information providers who provide information free for your use.

    Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

    Information Collection and Use

    We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

    We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

    Mondaq News Alerts

    In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


    A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

    Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

    Log Files

    We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


    This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

    Surveys & Contests

    From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


    If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


    From time to time Mondaq may send you emails promoting Mondaq services including new services. You may opt out of receiving such emails by clicking below.

    *** If you do not wish to receive any future announcements of services offered by Mondaq you may opt out by clicking here .


    This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

    Correcting/Updating Personal Information

    If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

    Notification of Changes

    If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

    How to contact Mondaq

    You can contact us with comments or queries at

    If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.

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