Guernsey has long been established as a leading jurisdiction for
insurance business; having been providing captive expertise for
almost 40 years.
Guernsey recently retained its title of European Captive
Domicile of the year at the UK Captive Services Awards, defeating
Dublin, Gibraltar, Isle of Man, Luxembourg and Malta, and is the
fourth largest captive domicile in the world.
However, what is notable is the surge in alternative risk
transfer business being structured through Guernsey, particularly
utilising insurance-linked securities (ILS) and
Alternative risk transfer (ART) uses methods
other than traditional insurance and reinsurance to provide risk
bearing entities with protection, mostly through the involvement of
capital markets investors. ART therefore usually involves
convergence of investment and insurance expertise, which is why it
is not surprising that Guernsey has seen such an increase in these
transactions, with its long-standing wealth of expertise in both
Types of ILS Products
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 a diverse group of capital market investors,
which generally include cat funds, hedge funds, private equity
funds, pension funds, banks and (re)insurers. 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
By way of example of an ILS sidecar transaction, Appleby
Guernsey has recently advised a major global provider of ART
services in relation to a collateralized marine reinsurance
structure using a Guernsey SPV 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 Exchange. Guernsey has a wealth
of experience in listings, being the jurisdiction of incorporation
for more non-UK entities listed on the LSE than any other
At Appleby we are also seeing a large increase in interest in
the use of Guernsey vehicles as insurance transformers, i.e.
vehicles through which reinsurers or insurers transform risks from
the capital markets into insurance or reinsurance form, or vice
versa. For example:
Derivative in – reinsurance out: the vehicle acquires
protection as protection buyer under a derivative with Party A and
acts as insurer under an insurance contract with Party B as
Reinsurance in – derivative out: the vehicle is the
insured under an insurance contract with Party A and acts as
protection seller under a derivative with Party B.
Typically, the Guernsey pioneered protected cell company is
used, or an incorporated cell company, and a different cell of the
cell company can be used for each type of transaction. With a
Guernsey cell company, the assets and liabilities of each cell are
legally segregated from those of the other cells and those of the
core of the protected cell company or the umbrella incorporated
cell company, but with the advantage of cost savings from only
being required to have one board of directors.
A further example of risk transfer activity we are seeing is the
use of cell company rent-a-captives to insure risks and receive
premiums and also enter into reinsurance contracts/risk transfer
transactions with third parties.
In conclusion, Guernsey insurance business appears to be in a
notably healthy phase, with 89 new international insurers licensed
in the Island during 2013, taking the total number of such insurers
to 758 at the end of 2013.
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.
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