Guernsey demonstrates agility and innovation in ILS market

12 February 2020

Written by Dominic Wheatley Guernsey Finance

Writing for Intelligent Insurer, Guernsey Finance Chief Executive Dominic Wheatley explains that recent developments in Guernsey have left the jurisdiction stronger and ready for growth in insurance-linked securities and reinsurance.

Insurance-linked securities is a relatively young industry, where ideas are emerging and developing at speed. But at its heart is the serious business of helping to rebuild shattered lives and communities after catastrophic trauma.

Through the industry insurers are playing a critical role in response and recovery, and nowdays, when even a “normal” year involves mass destruction and even fatalities, the new normal presents a challenging picture.

That market overview requires agility and innovation alongside professionalism, regulation and governance – qualities which lie at the heart of Guernsey as an international finance centre.

Guernsey’s insurance industry has quickly built a strong position in the global ILS market and particularly thrives on its long-held reputation for agility and innovation.

In the past 12 months Guernsey has made a number of developments in this area and again has proved it is well set to thrive, with further growth forecast for the ILS and reinsurance markets in 2020.

The most significant innovation in the past year in Guernsey involved the island confirming its position to allow rollover provisions for reinsurance contracts, with regulator the Guernsey Financial Services Commission allowing a 30-day period for collateral rollover.

This followed constructive discussions between the local insurance industry and the regulator, the Guernsey Financial Services Commission (GFSC), to agree this assistance for collateral management. It has been described as a “very good solution” – allowing a latitude of 30 days’ grace, subject to careful risk constraints and management and with the understanding of all sides.

The rollover move – now being mirrored by other jurisdictions and a source of considerable interest in industry discussions with potential clients – was announced shortly before the release of the world’s first hybrid vehicle for use in the ILS sector.

Christopher Anderson, Guernsey-based partner of offshore law firm Carey Olsen, came up with the concept of a protected or incorporated cell company that is both a licensed insurance company and a regulated investment fund. He said it would reduce the regulatory and governance burden for ILS managers, and would boost Guernsey’s prospects, as a large alternative investment fund jurisdiction, of hosting more ILS funds. Significant interest has been shown, though the product has not yet been used.

This summer’s activity in Guernsey’s ILS sector has also included confirmation about the island’s position with regards to the use of reinsurance from a third country outside the EU – such as Guernsey – for a European-domiciled entity.

Speaking at our ILS Insight event in Zurich, Jason Noronha, Head of Actuarial and Analytics at Aon, said that full credit would be given for Guernsey reinsurance assets within Solvency II calculations of EU ceding companies, where they are collateralised or appropriately rated.

This was welcome confirmation of the island’s position with regards to Solvency II and reinsurance. Common misunderstanding of this point has constrained the development of our sector, and I look forward to this message becoming much better known.

We have long said that Guernsey’s flexible and responsive regulatory regime is quicker, less prescriptive and more flexible than Solvency II – Guernsey distinguishes between different classes of insurer and places proportionate regulatory burdens on each.

The island’s regulatory regime for the insurance sector has also been praised by the International Association of Insurance Supervisors (IAIS), in a review published in June. The review approved the GFSC’s observance of IAIS Insurance Core Principles.

This report followed confirmation from the EU Council’s Code of Conduct Group and the European Council of Finance Ministers (ECOFIN) that the island’s tax regimes are cooperative and transparent, and that we had satisfied its legal substance requirements, which were both important validation for our position as an international insurance centre.

The IAIS report highlights high supervisory standards, a drive to be competitive on cost, and how the GFSC keeps up to speed with industry developments. It described its supervisory programmes as well-managed, well-organised and effective in dealing with policyholder risk.

The confirmation of substance is clearly important to us and to the sector, and it has not gone unnoticed that while Guernsey was white-listed, our major competitor jurisdictions in insurance have remained on the grey list. Anecdotally, this is already starting to have an impact in terms of inward business flows, as Guernsey continues to develop its leadership position in this sector.

This article first appeared in Intelligent Insurer, October 2019.

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