Sectors: 1063

Innovation and opportunity

17 October 2016

Written by Becky Butcher

Attendees at this year’s Guernsey Insurance Forum heard how Guernsey is positioning itself as a ‘significant player’ in the international insurance community, reports Becky Butcher of Captive Insurance Times.

After taking a break from hosting its annual insurance event, Guernsey Finance came back to the marketplace in style, hosting a fast-moving and informative event in London.

The event, moderated by ITV presenter Alistair Stewart, consisted of two panel discussions focusing on the latest market trends, developments and growth potentials in the captive insurance and captive reinsurance market in Guernsey.

In his opening speech, Dominic Wheatley, CEO of Guernsey Finance, spoke of “innovation” and “two new phenomena” that have started gathering momentum in Guernsey’s captive market.

Wheatley revealed the new trends that come from the roots of the reinsurance market, are insurance-linked securities (ILS) and collateralised reinsurance.

“To see all areas of our industry in such robust form demonstrates not only its quality and substance, but also emphasises that Guernsey is a player of significance in the international insurance community,” Wheatley said.

Market trends and developments

Steve Britton, managing director of Aon’s global ILS management and panellist at the forum, revealed that the worldwide ILS market doubled between 2010 and 2015, growing at a rate of 25 to 35 percent each year. He noted, however that, as of June this year, the rate of growth did dip to 10 percent.

Britton referred to a Goldman Sachs article from 2013, The 8 Extraordinary Technologies Forcing Businesses To Adapt Or Die, which noted that collateralised reinsurance was listed as the fourth largest growing trend.

Now in 2016, Britton described the ILS market as a “big baby” and emphasises the fact that the market is only going to get bigger. He noted that in the next five years the ILS market could represent $1 in every $5.

He said: “Growth will be driven by demand. There is already plenty of supply, there is just not enough demand for it yet. If there is demand, investors will put money into this market.”

The slow market is because of the current soft market, according to Britton. He suggested when a ‘big event’ happens, more money from investors will appear in the market.

He reassured attendees that although this year saw a dip in ILS growth, by next year rates should increase back to 15 to 20 percent.

Stewart asked panellists what is driving that demand in the industry, questioning whether the industry was reacting to growing demand or whether it was the industry creating demand.

To this, Britton suggested that the answer is both. He said: “If you talk to the bankers, who structure these transactions, they suggest there is still not enough demand. Collateralised reinsurance is just another form of offsetting capacity.”

According to Britton, considering the largest economic losses occurring in the world, there are still countries not purchasing insurance.

John Rowson, CEO of Kelvin Re, added that, while capacity is available, the industry should be making sure that insurance is being purchased in countries that currently do not buy it.

After Wheatley referred to Guernsey’s “innovation” in his opening speech, Mark Helyar, counsel of Bedell Cristin, revealed that Guernsey has drafted a set of rules to provide “extensive guidance” for its special purpose insurers (SPIs), set to go live before the end of 2016.

The panel discussed Guernsey building an SPI structure. Helyar, who helped to draft the new rules, explained that the draft has now been completed and is with the Guernsey Financial Services Commission (GFSC) for a final review.

He explained that the rules are “pretty much signed off” and “are expected to be in place by the end of the year”.

Before the new rules go live, a consultation paper will be sent out to the marketplace for comment.

Guernsey was also named as the domicile for other insurance captives, longevity swap transactions and various other reinsurance vehicles and arrangements.

These SPI rules already exist in Bermuda, making it possible for somebody looking from the outside to understand the jurisdiction’s approach to SPIs in terms of solvency and capitalization.

Heylar explained: “The work is already happening, the business is already being conducted in Guernsey, there was just no where to go to see what the rules were.”

“These new rules will be codifying digressions that the commission are passing different types of applications and it will be extensive guidance on the types of collateral available.”

With Guernsey also introducing the new rules, Helyar suggested that this would bring them “on to a level playing field” with Bermuda and other ILS domiciles.

Mark Cook, director at Willis Towers Watson, also drew attention back to innovation in Guernsey, discussing the rise of captives with employee benefit risk.

Cook noted that there are now approximately 100 captives funding employee benefit risk, with most of those launching over the last five years.

He said: “It is not just traditional risk products and health products we are talking about, stop-loss products, medical programmes and so on.”

Cook revealed that another trend he is seeing in the industry is a rise in longevity swaps. He used the British Telecom Pensions Scheme (BTPS) as an example.

BTPS was a £16 billion transaction, completed in July 2014, to transfer a quarter of its longevity risk to the Prudential Insurance Company of America.

BT established its own captive insurer, a Guernsey-based incorporated cell company (ICC), allowing it to access the reinsurance market directly without paying a bank or insurer to act as an intermediary.

“The reinsurance market is providing companies with a good deal compared to the traditional ones that banks are offering,” said Cook.


Stewart also questioned the panel on whether they thought Brexit was an opportunity, challenge or deadweight on the captive industry.

Oliver Schofield, executive director of RKH Reinsurance, described Brexit as an “opportunity”.

He said: “I don’t think it is something that we, as an industry, should be overly scared about.”

Schofield showed confidence that Brexit will not affect the captive marketplace, he said: “The insurance and reinsurance industry around the world has reacted well to times of uncertainty.”

When it was decided in June this year that the UK would leave the EU, there were concerns around passporting for captives. Schofield suggested that the industry should not be concerned about passporting issues in the captive market, but rather for other industries, as “there might be all kinds of issues”.

Schofield said: “For the captive industry, I see it as a great opportunity for people who are current owners or potential owners of captives to be able to take a long look at the playing field that there is and decide what is going to be the best approach for them.”

“I don’t believe that there will end up a regime that will strangle the benefits of captives to their corporate sponsors.”

Solvency II

With the uncertainty around Brexit, there are still a lot of questions around the UK and the Solvency II regime. Although legally the UK will not have to abide by the Solvency II initiative anymore, if it still wants to trade within the EU it will have to stick to the Solvency II legislation.

Schofield explained: “We also know that most insurers and reinsurers around the world, regardless of whether they are European headquartered or trading into Europe, regard Solvency II being the benchmark for superior finance management and I don’t see that as being a threat, I see that as an opportunity.”

On the flip side, Solvency II has the potential to push businesses away from the EU if they are against complying with Solvency II regulation.

Cook explained that one of Willis Towers Watson’s pension captive clients, based in the EU, is against complying with Solvency II for pension reserving. Because of this, the client is looking to move outside of the EU. Cook noted that this has been within the last six months.

IAIS insurance core principles

Stewart addressed Caroline Bradley, deputy director of the Guernsey Insurance Division and member of the International Association of Insurance Supervisors (IAIS) task force, to ask about any developments and how Guernsey stood within the latest IAIS meeting.

Bradley said that, from the first meeting, she recognised that the current IAIS insurance core principles (ICPs) need to be updated.

She explained that the current ICPs, relating to the supervision of reinsurance and reinsurers, would need to be updated because they reflect issues that were around at the time the standards were written.

Bradley recently attended a meeting, held in Bermuda with the newly set up IAIS task force, which was designed to review the ICPs.

She said: “We feel that it is important for Guernsey to be involved in those types of forums with that kind of company so that we can then ensure that the regulations, as they develop, take account of jurisdictions like Guernsey in terms of entities and the types of regulatory framework that we have.”

Bradley noted that the ICPs currently deal with things such as contract certainty, finite reinsurance and issues that were hot topics with regulators a number of years ago but that are not such an issue now.

She said: “I think we are well-placed in Guernsey within regulatory framework to both influence the standards that have been developed but also to meet those standards because in Guernsey we have always regulated reinsurers, whereas other jurisdictions haven’t so they are catching up with that.”

“I do think it is important for Guernsey to be in the forum so we can influence those standards as they develop.”

Wheatley expressed his enthusiasm towards Bradley’s work with the IAIS around global regulatory standards, and the possible creation of a level playing field.

In his closing remarks, Wheatley explained that although the collateralised reinsurance sector has seen growth, he can see the market growth “accelerating”.

According to Wheatley, there have long been rumours about the bottoming of the soft insurance market.

He said: “I think ever since 2002, people have been telling me that it’s going to bottom out any minute now.”

“I take the suggestion that we might be seeing the bottoming of the market with a massive pinch of salt.”

Wheatley suggested that, as a captive domicile, Guernsey remains at an advantage of being outside the EU and by being in an environment of “real substance” having not only a regulator by an industry of “true excellence” that all of those people who come to Guernsey for their captive business “appreciate greatly”.

“The Guernsey Insurance Forum has demonstrated how the global insurance market is changing, through evolution in some areas and transformation in others, and how the Guernsey industry is responding to these demands and opportunities with intelligence and energy and playing a key role in the innovation required,” added Wheatley.

This article was originally published by Captive Insurance Times, September 2016.

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