I don’t know if I share this in common with readers, but I confess that I sometimes find it difficult to explain to people what I do for a living. That is not only because I am a lawyer. Telling someone you are a lawyer can of course result in some quite extreme reactions depending on the audience and the circumstances, but happily less so these days than explaining you are a banker. However, if anyone has the stamina to continue with such a conversation, the minute I mention insurance, reinsurance, captives, insurance-linked securities or catastrophe (cat) bonds they glaze over as if I had gained the powers of a stage hypnotist. This has led to a search to define what it is that I (and we) spend much of my time doing so that I can summarise it better.
Commercial lawyers spend much of their time metaphorically beating one another up over the definition of terms in commercial agreements, usually at other people’s expense, for the purposes of achieving certainty or at least clarity in contracts. Classification of different types of business has, like taxonomy in science, also become a means of creating a shared vocabulary across languages and continents, among different classes of business, and to harness industry groups beneath regulation or government policy. But language doesn’t stand still, and nor does business, and sometimes we simply define things wrongly because we either don’t understand them, or they change over time. This can become damaging when business or indeed regulators become confined or limited by their own definitions or the scope of their own responsibilities, because it can stifle innovation or conversely lead to dangerous blind spots in regulatory supervision.
Defining a market
It may just be a lawyer’s OCD approach towards needing to define everyone and everything but I often have a nagging discontent with Guernsey’s complex range of insurance and reinsurance business being colloquially referred to as ‘captives’ or the ‘captive market’. This is a simplistic term to use for an industry with over £20bn in assets and a very wide range of structures and business; a place renowned for its innovation, such as with the development of the PCC. The reality today is that many insurance and reinsurance vehicles, and indeed most of the new ones, do not fit into the classic definition of ‘captives’ or ‘captive insurance’. Similarly, what we do in Guernsey in connection with ILS (insurance-linked securities) does not really accord with how the same term is used in the US or Bermuda, where it describes large catastrophe bond series’ issued by reinsurance companies to raise capital.
Perhaps it is time we ought to be a little more creative in the way the Guernsey insurance industry is defined and marketed, or indeed its statistics presented. While we innovate extremely well as a market, and obviously understand well the many shades of different insurance/ reinsurance structures which exist, markets like simple headlines and our competitors are always keen to discriminate against our capabilities by using our own definitions and statistics against us. Many times I hear competitors at international conferences briefing against us on the basis that Guernsey ‘isn’t a player’ or ‘doesn’t do ILS or reinsurance’, whether because ILS means purely cat bonds to those individuals, or because our own regulatory statistics support potentially misleading messages.
Sometimes we are also guilty of being far too nice about our competing jurisdictions, but perhaps this is more a reflection that many providers have businesses in more than one competing jurisdiction and corporate policy requires them not to campaign on a negative footing.
There are many new sub-categories which could be used to describe Guernsey insurance business for example:
- Captive insurance /reinsurance
- Reinsurance ‘proper’
- Collateralised reinsurance
- Insurance-linked funds
- Risk pools
- Longevity transformers'
- Multi-user ILS platforms
- Cellular life transformers
- Takaful securitisation
However, the perennial problem with this prescriptive approach to classification of business, like drafting tax law, is that I will almost certainly have left something out which doesn’t quite fit within the boxes.
Analysis of the net statistics in 2014 to the end of October, show there were 23 new PCC cells, ICC’s and ICC cells in Guernsey, bringing the gross total of licensed structures to 808 from 785 (up 3%). New ICC cells rose by 52% on the previous year and overall net worth by 7%. I know because of our involvement in many of these structures that the majority of new cells and structures are ILS or reinsurance/transformer related and many of the relevant cells write multiple, bespoke contracts. Net cell growth observed externally is not therefore a linear measure of current growth in ILS activity in Guernsey. These are certainly excellent growth figures in what is otherwise a flat and highly competitive offshore market for insurance administration business and a soft insurance and reinsurance market globally.
One thing we can be absolutely sure of is that the majority of this growth was not attributable to new captives, in the conventional sense of that definition. Nor was it ILS, in the sense in which the word is often used as a business definition on the other side of the Atlantic. So, from the lawyer’s perspective, we aren’t properly defined.
However troubling this is, and however many discussions we have, I keep returning to the conclusion ‘why worry’, if Guernsey is creating new structures and winning business without categorising itself accurately then why bother seeking out a better definition of its place in the market? We are certainly looking at innovations for our clients which have never been seen, such as partially listed captives which allow large companies to share risk with selected counterparties and new types of securitisation structures built around private equity style limited partnerships as potentially the first hybrid of specialist reinsurer and investment fund. These new developments don’t seem to be hampered by lack of definition, nor do they fit into any particular box. They rely on the complex network of complementary skills and experience in development of financial services products which Guernsey offers.
I have been told that an astute marketer, one of those persons whose phone calls I studiously avoid, might describe this as a clear market differentiator – the fact that Guernsey can’t be directly compared to other jurisdictions defines and explains its qualities as a place to do business, it is a jurisdiction which ‘does different’
Mark Helyar, a partner at Bedell Cristin, talks to Captive Review about Guernsey’s uniquely undefined insurance market