The proof is in the pudding for Guernsey’s ILS sector
11 July 2017
Guernsey’s ILS numbers reveal a booming market made better by regulatory innovation. Captive Insurance Times’ Becky Butcher speaks to Guernsey experts as to why.
There were 14 global insurance-linked securities (ILS) transactions with $2.76 billion of risk capital issued in Guernsey’s Q1 2017, approximately $1.4 billion above the 10-year average.
The results, which were published ahead of Guernsey’s fourth annual ILS masterclass in Zurich on 6 July, found that the outstanding market size of $27.19 billion is almost $377 million higher than at the end of 2016.
At the same time, the number of insurance entities in Guernsey increased from 804 to 835 during 2016, a year-on-year increase that has been attributed to growth in the ILS market.
Guernsey Finance Chief Executive Dominic Wheatley explained upon the release of the results: “As international fragility and uncertainty increases, the ILS market blossoms and Guernsey, with its 50 years of international insurance experience, has always taken an industry thought leadership role in this asset class.”
Wheatley went on to explain that the ILS business in Guernsey is taking the next step in its evolution by working out ways of dealing with emerging risks that are otherwise difficult to categorise or ringfence.
He says: “There has been some recent innovation in the industry and captives can play a significant role in those arrangements.”
The Guernsey Financial Services Commission (GFSC) is also innovating in the ILS space, with the implementation of a new set of rules to clarify the regulatory treatment of collateralised reinsurance.
The updates allow an applicant seeking a licence for a new special purpose insurer (SPI) to be granted a single consent for the formation of further SPIs without the need for further applications.
A streamlined application process allows new insurers to be established within one business day.
The Insurance Business (Solvency) Rules 2015 were also amended to include the new SPI class of insurer. Under the new rules, an SPI is not required to maintain the minimum or prescribed capital requirements, or to conduct its own risk or solvency assessments.
This approach reflects the risks associated with SPIs, where typically 100 percent of the possible loss associated with underwriting a reinsurance contract is held in a trust account independent of the SPI vehicle.
Typically, cash assets will be applied against liabilities. However, under the changes, the GFSC recognises that the commercial interests of the counterparties may be satisfied using insurance and reinsurance, letters of credit or partly paid shares.
These changes demonstrate Guernsey’s equivalence approach to Bermuda, cementing it as an alternative jurisdiction for ILS business within the European timezones.
Paul Sykes, managing director at Aon Guernsey, says the changes “reinforce its success, but Guernsey is also building on what was already there”.
Stewart McLaughlin, executive director at Aon Guernsey, notes that the updates put Guernsey on a “level playing field” with other ILS jurisdictions, including Bermuda.
Bermuda and other jurisdictions had the advantage of SPV legislation, particularly tailored towards ILS business, but by making these changes, McLaughlin believes that Guernsey is now at the forefront of the ILS industry.
The new rules now make it easier for new business to enter the industry.
McLaughlin says: “For additional ILS managers coming into the market, the rules make the process a lot more streamlined, so for new entries to the market, it is good news.”
Of course, the market for ILS is about to become more competitive, with the UK’s plans for London hailed as a potential game changer by the city’s local insurers.
The UK government has released two consultations on implementation of ILS-friendly rules, suggesting that the regime could be in place as early as this year.
Stephen Barclay, economic secretary to the Treasury, echoed many of the sentiments behind London’s ILS regime in a recent letter.
He wrote: “London is the single biggest market for specialist risk in the world and is a global hub for insurance and reinsurance business.
“But this global business is evolving rapidly and the UK must innovate if London is to retain its uniquely important position in the market.”
Guernsey should take the UK ‘seriously’ as it sets up an ILS regime in London, according to McLaughlin.
He suggests that one of the reasons for concern is that the UK’s initial plans have been “comprehensive” and the London Market Group’s ILS taskforce has a “very strong” panel of members with a wealth of experience.
He does add: “I understand some of the roadblocks include how the UK will provide a tax-neutral environment, expedite regulatory approval and implement protected cell company legislation— three major hurdles that have to be overcome.
“When London states it is seeking to be the centre for the future development of this business, Guernsey needs to take them seriously.
“Guernsey is mindful of the competitive forces and continues to innovate and introduce improvements to its ILS environment, such as the SPI regime improvements that the GFSC issued in September, to stay out in front.”
Justin Wallen, head of ILS at Artex Guernsey, suggests that the new ILS regime will ‘not necessarily be a problem’ for Guernsey.
Wallen says ‘the proof will be in the pudding’ as to whether or not London can achieve the same level of efficiency, cost and service that ILS funds in Guernsey are already receiving, as well as those in Bermuda and Cayman.
“Our clients have confidence about the product and service they are going to get in Guernsey and they know that the transaction can be turned around quickly and cost-effectively,” Wallen explains. “The first few transactions in London will be closely watched as to whether or not they can achieve what we’re already achieving.”
An original version of this article was first published in Captive Insurance Times’ Guernsey Insight, July 2017.
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