Ahead of the curve

01 June 2017

Written by Dominic Wheatley

Guernsey Finance Chief Executive Dominic Wheatley speaks to Captive Review about how special purpose insurer rules refine and evolve Guernsey’s ILS offering.

This year marks 20 years since Guernsey introduced the protected cell company (PCC) to the world for use in the captive insurance sector.

The success of this innovation is illustrated by the fact it is now used across financial services as an alternative application for the structuring of many different types of products, including insurance-linked securities (ILS).

For example, Aon’s White Rock Insurance Company PCC Limited was established in Guernsey as the world’s first PCC and been used by more than 100 corporations as a cell captive facility and grown to be the largest structure of its kind globally.

The fact that Guernsey pioneered the concept means it has developed significant experience in this area and is now recognised as Europe’s number one captive domicile.

It means the ILS sector is one Guernsey can combine its insurance expertise with that also gained in the investment funds space where the island is the global leader for non-UK listed entities on the London Stock Exchange (LSE) markets. With 124 Guernsey-incorporated entities, the island is more than 40 ahead of its nearest competitor.

This is particularly important when considering the fact that raising sufficient liquidity is a major challenge for many insurance-related funds and Guernsey is therefore able to offer a prime solution not only through the LSE, but other global markets.

Continued growth

This year saw Guernsey further refine and evolve its ILS offering by publishing special purpose insurer (SPI) rules which clarify the regulatory treatment of collateralised reinsurance, including ILS, and also allow for a one-day approval process.

The Insurance Business (Special Purpose Insurer) Rules 2016 allow an applicant for the licensing of a new SPI to be granted a single consent for the formation of further SPIs without call for further application. The rules effectively codify the discretions already applied by Guernsey’s regulator under existing 2002 legislation, while the streamlined application process allows new insurers to be established within one business day.

Mark Helyar, Of Counsel at Bedell Cristin, who helped draft the SPI legislation, said those ‘in the know’ were already familiar with the Guernsey approach, but the rules were now available to all.

“Previously, comparing Guernsey’s approach to, for example, Bermuda, had been difficult because of the lack of transparent, independent guidance about how ILS works and is licensed and regulated. It had been an area which competitors were keen to highlight to potential clients because it enabled them to imply a lack of certainty, but that was never a true reflection of the regulatory approach in Guernsey,” explains Helyar.

These rules are therefore an important codification and will sustain Guernsey’s innovation in the ILS space.

For example, in 2012, the Guernsey-headquartered Channel Islands Securities Exchange (CISE) - recently rebranded as The International Stock Exchange - became home to the first private catastrophe bond listed on any exchange worldwide. Upon the listing of Solidum Re Eiger IC Limited on the CISE, Cedric Edmonds, partner at Solidum Partners, extolled the virtues of Guernsey as an ILS destination by highlighting its ICC legislation and the quality and ‘can do’ attitude of its service providers when faced with something new.

The future

Guernsey has also amended its Insurance Business (Solvency) Rules 2015 to expressly include the new SPI class of insurer. Under the new rules a SPI is not required to maintain the minimum or prescribed capital requirements, nor to conduct its own risk or solvency assessments. This approach properly reflects the risks associated as SPIs must be fully collateralised to the extent of their liabilities and, in addition to ILS, may include collateralised reinsurance, catastrophe bonds, side-cars and life-based securitisations.

Typically, cash assets will be applied against liabilities. However, under the changes, the Guernsey regulator recognises that the commercial interests of the counterparties may be satisfied using (re)insurance, letters of credit or partly paid shares.

These changes demonstrate Guernsey’s ability to respond to market demand and to provide a leading European option for ILS. Those familiar with Guernsey will not be surprised by its nimble ability to innovate and evolve.

An original version of this article was first published in Captive Review's 2017 ILS Report.

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