Guernsey: Investing In ILS Through Guernsey

Last Updated: 13 May 2015
Article by Richard Searle

Most Read Contributor in Guernsey, November 2016

HFMWeek (HFM): How has the global insurance-linked securities (ILS) market developed over the past 12 months?

Richard Searle (RS): The global ILS market has developed significantly in recent years with 2014 showing a record breaking year with over $24.3bn on risk covering catastrophe bonds at 31 December 2014, according to the Aon Benfield fourth-quarter 2014 update. Strong investor demand has fed larger transactions across the market with coverage being extended into a variety of risks, some of which are outside the traditional catastrophe bond market.

HFM: Will the changes announced in this year's UK budget (allowing ILS to be domiciled in the UK) affect other jurisdictions in terms of competition and volumes of business? What can Guernsey offer that the UK cannot?

RS: The timing of George Osborne's announcement on 18 March 2015 that the government will explicitly target ILS in a plan to grow the London insurance market was particularly interesting considering it fell on the same day that Guernsey Finance presented its ILS Insight London at the British Museum.

The general response to the announcement was that this reinforces recognition of the ILS market as an important piece of the financial services jigsaw. One could take the view that London would be a new competitor to Guernsey in this particular sector though I see a broader welcoming of the announcement. Specifically, this demonstrates recognition of the maturity of this market and of ILS as an asset class that is now considered to be more mainstream than alternative.

Regarding other jurisdictions, there are clearly a number of locations that have been offering ILS products very successfully for many years. Any successful product is bound to attract new entrants to the market and this is to be welcomed. In terms of the impact on Guernsey and what it can offer that the UK cannot, I think it is more beneficial to focus on how Guernsey offers solutions to the market as opposed to looking for unique selling points.

The long history of innovative insurance, PCC and ICC structures in Guernsey, supported by the mature fund, fiduciary, accounting and legal industries means that there is a high concentration of extensive expertise in Guernsey operating under a stable regulatory environment, the size and experience of which means that Guernsey can respond rapidly to changes in the market place.

HFM: There has been a growth in hedge funds launching reinsurance arms. What do you think of this trend?

RS: The growth in hedge funds launching reinsurance arms could be seen as a natural development in an industry that is always on the lookout for opportunities for its investors. A number of hedge funds have operated in this space for quite some time and the formalisation of this structuring through reinsurance arms again reinforces the attractiveness of insurance products as part of an investment strategy.

When considering yields across certain asset classes in recent years it is easy to see why insurance would be an attractive option, particularly given the lack of correlation between insurance risk and the market risk that affects many other asset classes. Nevertheless, there are clearly hurdles to be overcome for any fund managers considering a foray into the insurance market, not least being the regulatory environments, costs and minimising management's distraction from the core business of the hedge fund.

One solution that we have seen working very well to this is where fund managers have invested into ILS products through existing ILS structures, which are typically in cell company models such as Aon's White Rock Insurance Company PCC Limited, White Rock Insurance (Guernsey) ICC Limited and Robus Group's Hexagon Insurance PCC. The advantage of such structures is that they allow investors to diversify their asset class risk whilst still giving them the reassurance that comes with a well regulated and governed structure in an established and stable environment, yet in a relatively low cost investment platform.

Cellular structures can operate with multiple investment managers investing into different cells as in the aforementioned models, or alternatively with a single investment manager invested into an entire PCC or ICC using multiple cells for different funds, as in the case with Secquaero Re (Guernsey) ICC Limited, managed by Aon Insurance Managers Guernsey. Both solutions have equally compelling arguments in their favour and the adoption of one or the other really depends on the specific circumstances of the individual manager, fund(s), and investor bases involved.

HFM: How does the ILS market in Guernsey compare to rival domiciles?

RS: As mentioned before, there are a number of jurisdictions that offer ILS products and it would be difficult to select the unique selling point that can be used to claim dominance over all other domiciles. Similarly within each jurisdiction there will clearly be appropriate pairings between ILS providers and their typical client base and geographies.

I think Guernsey enjoys a concentration of core expertise with significant experience in insurance and investment management as well as accounting and legal experience. Furthermore, the nature of the fund and insurance industries in Guernsey has created a significant level of experience not just in locally-based structures but also in international financial services regulation and structuring.

Finally, the regulatory environment has developed over the past three decades to evolve into a robust yet proportionate regulatory framework in which a key selling point for Guernsey is the speed of response and ease of access to the regulator.

HFM: In which direction do you predict cat bond yields will go over the next 12 to 18 months?

RS: The prediction of cat bond yields is a complex matter. That said, it is clear that cat bond yields have been falling in recent times as have reinsurance rates, and these may well be a simple effect of supply and demand. It is important that any investment manager continues to look not just at yields but also at the level of returns relative to the risks involved in the asset class and the diversity of the fund's portfolio.

HFM: How do you see the ILS sector developing over the next five years in terms of investor interest?

RS: The next five years promise to be an interesting andexciting time in the development of the ILS sector. Theincreasing level of awareness in recent years in this sectorhas created additional demand which has most likely hadan effect on pricing.

I think there will continue to be anexpansion of ILS products into other risks in addition tothe more traditional catastrophe bond products, and wehave already seen this in the market with a Shariah-compliantlisted bond accessing life assurance risk, and withlongevity risk transfer products. There will also likely be animpact of technology and a greater move towards insuranceproducts reporting in-line with investor demands.

Infact we have already seen this with discussions around thereporting of daily NAVs on one ILS client to its investorfunds. This will present an interesting balancing act betweeninvestors' desire to respond quickly to events andwhat is essentially an illiquid and long-term underlyingasset class.

In summary, the future looks exciting for theILS sector with greater interest and investor appetite beingseen from funds and it is encouraging that Guernsey is very well placed to provide innovative solutions to meetinvestor needs.

An original version of this article was published in HFM Week, Guernsey supplement, April 2015.

For more information about Guernsey's finance industry please visit www.guernseyfinance.com.

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 Mondaq.com.

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

Authors
 
In association with
Mondaq Advice Centre (MACs)
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
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
Password
Confirm Password
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (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 www.mondaq.com

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 Mondaq.com’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.

Disclaimer

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.

Registration

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 by clicking here .

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 unsubscribe@mondaq.com 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.

Cookies

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.

Links

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.

Mail-A-Friend

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.

Security

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 webmaster@mondaq.com.

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 EditorialAdvisor@mondaq.com.

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 enquiries@mondaq.com.

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