Guernsey’s cell company expertise demonstrated in longevity risk offering
26 October 2015
“Experience in using cell structures to provide solutions to the insurance sector is strengthening the island’s position as a leading domicile”, says Dominic Wheatley, chief executive of Guernsey Finance.
Guernsey has long been recognised as a captive insurance and cell company leader and the past 12 months have only served to reinforce this position.
In the last year two ground-breaking longevity swap structures were established in Guernsey using captive insurance companies in place of insurance intermediaries, thereby cutting out intermediary fees and removing the need for price averaging.
In the first of these the trustees of the BT Pension Scheme, Britain’s largest corporate pension fund, set up its own captive insurance company, and then reinsured its longevity risk with the US-based life insurance company, the Prudential Insurance Company of America. In the biggest deal of its kind, the arrangement covered 25 percent of the scheme’s exposure to increased life expectancy and amounted to £16 billion ($24 billion) of the scheme’s liabilities.
This was followed by the Towers Watson ‘Longevity Direct’ structure which enables pension schemes to gain direct access to the reinsurance market in order to hedge longevity risk for their defined benefit liabilities. Through a form of ‘rent-a-captive’ the structure allows pension schemes to own a ready-made insurance cell that can write insurance and reinsurance contracts for longevity swap transactions, particularly for those liabilities between £1 billion and £3 billion ($1.5 and $4.5 billion).
The BT and Towers Watson structures both utilised a Guernsey incorporated cell company (ICC) as the vehicle for their respective captive insurance companies, BTPS Insurance ICC Ltd and Towers Watson ICC Limited. It was announced at the start of this year that the Merchant Navy Officers Pension Fund (MNOPF) had utilised a cell within the Towers Watson ICC structure to hedge £1.5 billion of its own longevity risk. In the transaction MNOPF IC Limited reinsured the risk with Pacific Life Re.
More recently, Artex has joined forces with PricewaterhouseCoopers (PwC) to create a Guernsey-domiciled ICC called Iccaria. This not only offers pension funds the benefit of cost-effective risk transfer but also a flexible structure which enables pension funds to select the service providers they wish to use to administer the arrangements. It is anticipated that pension schemes with liabilities as low as £250 million will be able to benefit by using the Iccaria facility.
Providing access to the reinsurance market through these types of cell structures is making the hedging of pension risk more affordable for schemes, while also reducing the complexity that is often associated with longevity hedging.
Guernsey’s reputation in this area dates back to when it pioneered the cell company concept back in 1997 with the introduction of the protected cell company (PCC) for use in the captive insurance sector.
The ICC followed soon after, with the success of these innovations illustrated by the fact that the cell company is now used across the financial services world as an alternative application for the structuring of many different types of products.
A PCC is a company made up of a core and individual cells. Each cell is distinct and therefore the assets and liabilities cannot be mixed. The legal segregation ensures that no claim against one cell will be covered by the funds from another. The ICC, like the PCC, has cells but in this case they are separately incorporated and distinct legal entities. This offers the advantage of greater flexibility in terms of individual cells being able to migrate away from main structure and also potentially amalgamate or merge with other incorporated entities.
The fact that Guernsey pioneered the concept means that the island has developed significant experience and expertise in using cell companies. For example:
- Aon’s White Rock Insurance Company PCC Limited was established in Guernsey as the first PCC in the world. Since inception it has been used by more than 100 corporations as a cell captive facility and grown to be the largest structure of its kind globally.
- White Rock Insurance (Guernsey) ICC Limited—also Aon-owned— was the first ICC in the world to be insurance licensed.
- Guernsey-based Heritage Insurance Management (now Artex International) achieved a worldwide first in 2010 by amalgamating two PCCs—with 17 cells between them—into one.
Figures from the Guernsey Financial Services Commission (GFSC) show that the number of international insurance entities domiciled in the island at the end of June this year stood at 816, up 19 from the end of December 2014. The 816 entities comprised 244 limited companies, 67 PCCs, 393 PCC cells, 13 ICCs and 40 ICC cells and 59 life policy cells.
In addition to pension longevity structures, much of Guernsey’s recent growth in PCCs, ICCs and associated cells has been in relation to insurance-linked securities (ILS), where the island’s experience in both insurance and investment funds, including listings on international stock exchanges, means it is ideally positioned to provide bespoke solutions to meet client needs.
In fact, GFSC figures to the end of 2014 showed that 45 percent of new insurance business coming to the island in that year was ILS-orientated. In light of the ILS market showing no signs of slowing down, we held our second ILS Masterclass this year. Our first event was held in Zurich in July last year, while the follow-up event in London took place in March.
‘ILS Insight London’ was attended by more than 140 delegates and brought together experts from across the ILS space for dialogue and debate surrounding the key industry issues. It underlined Guernsey’s position as a leading centre for ILS transactions and in particular, the island’s innovative approach to a diverse range of transactions and risks.
The Guernsey International Insurance Association has produced guidance notes on the formation and management of insurance and reinsurance special purpose vehicles in Guernsey. Due to the growing frequency of enquiries, this guidance note has been prepared to explain the exercise by the GFSC of various discretions contained within the regulations and legislation in force in Guernsey. It also explains the application of these discretionary areas of the regulations to special purpose vehicle insurers, in particular those conducting reinsurance, derivative swaps and ILS business or being utilised to transform capital market to insurance or reinsurance market risk or vice versa, whether long term or otherwise.
Guernsey has long been committed to the International Association of Insurance Supervisors (IAIS), and this is further witnessed by our implementation of its revised core principles of insurance regulation that will be completed in the coming months.
This proportionate approach sends a strong message to the marketplace that the GFSC is pragmatic and flexible as a regulator without compromising the robustness of Guernsey’s regulatory regime.
It is this union of an innovative industry and intelligent regulation that is underpinning the continued growth within Guernsey’s mature international insurance sector and why we remain one of the leading insurance domiciles in the world. This is also in no small part due to our experience and expertise in using the cell company to provide solutions to the insurance sector and beyond.
An original version of this article was published in EMEA Captive, October 2015.Back to News
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