Insurance linked securities ("ILS")
are growing as an alternative asset class for a diverse group of
capital markets investors, including investment funds. Further, the
sponsors of ILS products are showing increasing interest in
Guernsey as the jurisdiction in which to establish their ILS
structure (where Bermuda has traditionally dominated).
ILS products typically include catastrophe bonds
("Cat bonds"), industry loss warranties
("ILWs") and sidecars. Cat bonds are
risk-linked securities that transfer catastrophe risks to capital
market investors. ILWs enable a purchaser to buy protection based
on insurance industry losses arising from a specific event, rather
than from the buyer's losses. Sidecars are special limited
purpose (re)insurance companies which assume a portion of the
ceding (re)insurer's underwriting risks (including losses and
expenses) in exchange for a proportional share of the premium. ILS
products typically cover natural catastrophes (hurricanes,
earthquakes), life insurance (mortality and longevity) and man-made
events (fire, terrorism, even lottery jackpot losses).
The sponsors of ILS products are (re)insurance companies,
governments and companies who use ILS to transfer their
(re)insurance risks to the capital markets, including specialist
cat funds, hedge funds, private equity funds, pension funds, banks
ILS products are used by sponsors as an alternative risk
management solution to achieve capital efficient and flexible
underwriting capacity, finance growth and to spread the risk to the
capital markets. In this way ILS have become a viable alternative
to the traditional (re)insurance markets.
From the perspective of the investment funds which are
increasingly investing in ILS, ILS offer a number of advantages
over other asset classes, including:
a diversifier largely uncorrelated with other major asset
classes and the general financial markets;
comparatively high potential returns for investors through
investment income on the investment in the ILS structure, together
with premiums paid to the ILS structure to take on the risk,
against low probability catastrophe or other insured events;
comparatively short investment term, which offers a degree of
liquidity - for example, Cat bonds are typically 12 months to 5
low credit risk of the (re)insurer counterparties.
As an example of an ILS sidecar transaction, Appleby Guernsey
has recently advised a major global provider of alternative risk
transfer services in relation to a collateralized marine
reinsurance structure using a Guernsey special purpose vehicle
reinsurance company as a sidecar, with investment fund investors
effectively providing the collateral through preference share
subscriptions into the structure.
Although the ILS in that transaction were not listed, Guernsey
is well placed to accommodate ILS listings. Guernsey provides
access to the London Stock Exchange (LSE) and
other international exchanges, including Hong Kong, Toronto,
Ireland, Euronext, as well as the Channel Islands Securities
Appleby Guernsey is also currently advising on an ILS Cat bond
structure whereby a pool of investors will invest into an
incorporated cell of a Guernsey incorporated cell company, which
will either be licensed under Guernsey's insurance law to
reinsure catastrophe risks of the sponsor reinsurer, or, as an
alternative to a reinsurance contract, will enter into a derivative
contract with the sponsor reinsurer.
Article first published in Business Brief - May
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