Guernsey Finance hosted its ILS Insight webinar earlier this month, with our panel discussing Covid-19, insurance's role in sustainable finance, and Brexit. We didn't have time to answer all the questions from delegates at the end, so we put them to our panellists. Adele Gale (AG), Head of ILS at Robus Group in Guernsey, provided the on-island view, while the off-island perspective was given by Schroder Secquaero Head of Transaction Management Jutta Kath (JK).
How is Guernsey's commitment to green finance going to be affected by COVID-19?
AG: For me personally, pulling together as a community to rid Guernsey of COVID-19 cases has illustrated what can be done if we work together. Many in Guernsey feel it's more important than ever to embrace green and ESG issues and work together for change.
How can Guernsey become a global leader in the ESG compliant funds space? Other than a kitemark, what does it need to put in place to attract new business?
AG: We need to be a domicile with credentials, to build the cost of environmental and social implications firmly into our decision making and to be transparent. We want to create a framework of what "good" looks like and help our clients to achieve their ESG goals throughout their supply chain.
JK: A general thought on ESG is that the internal view of the component will become more relevant. I am specially referring the to "S" in ESG. Investors will look at how the companies treat their own employees and want to see evidence and not just PR (inclusion and diversity in terms of hard stats, gender pay gap, age distribution etc).
Are there potential ILS solutions to address the rising risks in emerging markets? If so, can you please elaborate, and how Guernsey can play a role in this?
AG: Guernsey offers structural solutions to protect communities in emerging markets in the wake of catastrophes. Please get in touch if you want to know more about how we can help.
JK: I am thinking of solutions with sponsors such as the world bank. Guernsey can also offer solutions there. I would not restrict this to other solutions.
How do other ILS jurisdictions, such as London or Bermuda, deal with collateral rollover?
JK: Not as actively as Guernsey with its specific provision. More often than not, it becomes a discussion with the cedant and how flexible it is. We have also seen penalty provisions in the wordings for failure to post at a given time or to top you. Again, this is a bilateral agreement.
AG: Guernsey is not part of Solvency II and is therefore not constrained by the requirements of the Directive. Our Regulator has issued a clear statement on how it expects SPIs to operate over a renewal. SPIs must remain "Fully Funded" at all times but a 30-day window for administrative delays in setting up and capitalising trust accounts or other collateral mechanisms is recognised as practical. The Regulator does not expect additional collateral to be posted for a renewal effectively creating double funding while the expiring year is commuted.
Many ILS funds are deploying via CAT Bonds and Standalone reinsurance vehicles - is this the beginning of the end of the collateralised market?
AG: There are many apparent signals that collateralised transactions are less popular than they once were. Cat bonds offer something quite different to collateralised transactions and allocation towards these assets offers liquidity in the wider context of a volatile equities market. There are also some fund structures, such as UCITS, which prevent investment into collateralised cells without a wider platform diluting ownership of each cell and for UCITS, cat bonds will make up the bulk of their investments. Another apparent signal is the creation of Lumen Re by LGT, Bernina Re by Credit Suisse and more recently Odin Re by Securis. However, these vehicles continue to use collateralised reinsurance on all transactions while in addition providing an inhouse fronting solution to increase the spread of the ILS Funds' control of the value chain. Collateralised reinsurance can be developed into a sophisticated solution but it remains nimble and quick to execute for new entrants, it has a fundamental role to play in a hardening market.
JK: It may be a self-serving answer but no, I don't think so. It depends on the strategy of the fund which vehicles fit its strategy. Hence, you may want to stay engaged in the coll Re market. However, this also needs a certain skill set and market visibility. Also, you would give up the flexibility to capture favourable market conditions if you restricted yourself.
What is your outlook on ILS capacity and demand from buyers post-Covid?
JK: To the extent that funds become more selective, capacity will be more restricted and only applied to truly profitable deals. Post-Covid we will also see changes to wordings (in terms of exclusions) and at the same time clarity about coverage demands.
AG: ILS capacity has the ability to be nimble and responsive to market needs when the price is right. Post-Covid 19, in a hardening market, I think ILS capacity will be as important as ever. Guernsey's secure, low-debt financial position, the robustness of our business continuity planning and our expertise in ILS, mean post-Covid we are ideally placed to domicile your new ILS structures.
How can ILS structures evolve post-Covid to manage the risk of trapped capital?
JK: More emphasis on buffer loss language but in an effort to meet the balance between investors' and cedants' interest. If you are too restrictive and hold back money for too long, investors' interest will fade.
AG: Covid-19 is an event which has affected all lines of business to some extent, the event is ongoing and the quantum unknown. There will be a tendency to think that rated structures offer greater capital flexibility for the reinsurer and this is true but where exposure is un-diversified that capital flexibility may not sufficiently compensate capital providers once the significantly higher cost base is factored in along with the demands of more permanent capital providers. Within the collateralised space Guernsey provides flexibility to cedants and collateralised reinsurers to negotiate the best terms. We allow claw back which means, where an ILS Fund can maintain liquidity and semi-permanent capital, the transformer is able to offer the cedant flexibility to reduce buffers on losses and release collateral speedily. We also offer contingent capital facilitating reinstatements in collateralised markets. The GFSC provides clear policy statements and consistency on approach to reduce regulatory risk in these uncertain times.
What specific competitive advantages does Guernsey offer ILS market participants over other domiciles – e.g. lower transaction costs, lower capital reserve requirements?
AG: Guernsey is widely believed to be cheaper than other jurisdictions in terms of legal fees and transaction set-up costs. Proximity to Europe and regulatory certainty over collateral requirements are the USPs we like to promote most often. In truth the benefits of using Guernsey are specific to every client and every transaction, and we would be happy to analyse these relative to your specific desired structure.
To listen back to the webinar in full on-demand, visit our event webpage.
Originally published July 23, 2020.
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