ILS adds to Guernsey’s range of options for insurers

4
CAPTIVE GUERNSEY REPORT 2014
GUERNSEY | GUERNSEY FINANCE
The latest fi gures from the Guernsey
Financial Services Commission
(GFSC) show that Guernsey continues
to grow its insurance industry.
At the end of December 2013,
there were 758 licensed international insurers
in Guernsey – a net growth of 21 international
insurers over the previous 12 months. Much
of this growth relates to the use of protected
cell companies (PCCs), incorporated cell
companies (ICCs) and associated cells within
the increasingly popular concept of insurance
linked securities (ILS).
The reasons for the attractiveness of ILS as
a structure and an alternative asset class for
insurers and investors are two-fold:
1. ILS permits an insurer to purchase
additional protection for low frequency,
high severity losses, including natural
and non-natural perils, operating in the
traditional insurance market, typically
in the form of catastrophe ‘cat’ bonds or
collateralised reinsurance.
2. Investors like ILS because returns are
non-correlated with the general fi nancial
markets.
Guernsey’s great strength is that it has a
long and strong heritage in both the investment
funds and insurance sectors, making
it the optimum location for ILS. Remember,
Guernsey pioneered the cell company concept
back in 1997 with the introduction of the
PCC for use in the captive insurance sector.
The subsequent success of this innovation
is illustrated by the fact that we’re ranked as
the number one captive insurance domicile in
Europe and the fourth largest globally, while
the cell company is now used across the fi nancial
services world as an alternative application
for the structuring of many different types
of products. As well as adopting the similarly
innovative ICC, the island has, through legislative
advancements, developed a regulatory
infrastructure that enables them to be widely
employed.
PCC and ICC structures provide a low cost,
low administration vehicle to access returns
from the reinsurance market and some ILS
funds avail themselves of both within their
growth strategies.
Guernsey pedigree
At the time of writing there are in excess of 50
protected cells established in Guernsey across
four different PCC platforms having written
fully collateralised reinsurance primarily
covering property catastrophe risks, marine,
crop and other classes such as premium rein-
Fiona Le Poidevin of Guernsey Finance talks to Captive Review about the island’s success
as a captive domicile
“Guernsey’s great strength is that it has a long and
strong heritage in both the investment funds and
insurance sectors, making it the optimum location
for ILS”
Written by
Fiona Le Poidevin
Fiona Le Poidevin is chief executive of Guernsey
Finance, the promotional agency for Guernsey’s
fi nance industry. Previously a senior tax manager
with a large accountancy fi rm, she has over 15 years’
experience working in fi nancial services in both the
UK and Guernsey.
ILS ADDS TO
GUERNSEY’S RANGE
OF OPTIONS FOR
INSURERS
5
CAPTIVE GUERNSEY REPORT 2014
GUERNSEY FINANCE | GUERNSEY
statement or prize indemnity. Protected cells
in Guernsey are also being used to conclude
International Swaps and Derivatives Association
(ISDA) arrangements as an alternative to
a reinsurance contract.
In 2012, the Channel Islands Securities
Exchange (CISE), formerly known as the
Channel Islands Stock Exchange (CISX),
became home to the first private catastrophe
bond listed on any exchange worldwide when
Aon Insurance Managers in Guernsey – which
has been involved with more than 80 ILS
transactions since 2006 – worked with Swiss
ILS manager Solidum Partners AG to establish
Solidum Re Eiger IC Limited. It is an insurance
vehicle which listed bonds with a value
of $52.5m on the CISE and was the first CISE
listing where natural catastrophe perils are
the underlying exposure for ‘principal at risk’
notes. It also incorporated a dual listing with
the Vienna Stock Exchange.
Cedric Edmonds, partner at Solidum
Partners and director of Solidum Re Eiger
IC Limited, said Solidum Partners selected
Guernsey as its jurisdiction of choice for its
incorporated cell reinsurance company and
private catastrophe bond platform due to the
“incorporated cell company legislation and
the quality and ‘can do’ attitude of the service
providers”.
As Europe’s number one captive insurance
domicile, the island plays host to subsidiaries of
global names such as AIG, Aon, Barbican, Catlin,
Generali, Hiscox, JLT, Marsh, Old Mutual,
Royal & Sun Alliance, SCOR and Willis, as well
as independent, boutique operators such as
Heritage Insurance Management, Alternative
Risk Management (ARM) and Kane. The sector
is also complemented by banking, investment
and fiduciary sectors and supported by a network
of professional services, including legal,
tax, accounting and actuarial advisers.
The pre-eminence of Guernsey as a captive
insurance domicile is underlined by the fact
that approximately 40% of the leading 100
companies on the London Stock Exchange
with captives have them domiciled in the
island. Indeed, a significant majority of the
international insurers licensed in Guernsey
have their parent company located in the UK.
However, the island’s insurance sector is truly
international. Firms from across Europe, the
US, South Africa, Australia, Asia, the Middle
East and the Caribbean have all established
captives in the island. Oil giant BP has its own
captive insurance company, Jupiter Insurance,
domiciled in Guernsey, as does global
mining company BHP Billiton through Stein
Insurance Company.
Regulatory certainty
In January 2011 Guernsey announced it was
not seeking equivalence under Solvency II.
We declared our stance as early as possible
because we wanted to give current and potential
clients certainty and clarity regarding the
regulation of insurance business in Guernsey.
The island also believes applying Solvency II
as it is currently constructed would burden
insurers in Guernsey with additional costs and
render currently effective captive business
plans uneconomic, particularly as Solvency II
was not designed for captives as they have parent
companies as their policyholders.
The European Captive Insurance and Reinsurance
Owners’ Association (ECIROA) has
similarly found issues with the way Solvency
II has been drawn up. The Directive may have
had its implementation date pushed back to
2016, but as it currently stands eight out of
10 European captives would fail to qualify
for solvency capital treatment because they
carry liabilities underwritten for disposed
entities, according to ECIROA. If the rules
go unchanged then ECIROA believes many
captives will be forced to close or move outside
of the EU to escape the onerous capital
and reporting requirements required under
Solvency II.
We certainly feel the early clarity we gave
in relation to Solvency II has played a part in
the continued growth of our captive sector
over the past couple of years. Indeed, a number
of Guernsey practitioners have already
reported receiving instructions to migrate
captives from jurisdictions such as Bermuda
to Guernsey, due to the uncertainty created
by the delays associated with Solvency II and
the requirements for equivalence within the
Directive itself.
This clearly demonstrates that captive owners
recognise Guernsey’s expertise in the sector.
They like our close proximity to London,
our speedy and proportionate regulation and
that our decision not to seek equivalence with
Solvency II had the backing of owners with
captives already in the island.
Conclusion
The insurance industry in Guernsey has its
origins dating back to the 18th century and
the island’s first captive insurance company
was incorporated in 1922. Since that time we
have continually evolved our offering, with
ILS becoming just the latest concept that can
capitalise on the expertise we have honed in
the captive insurance markets and which, in
turn, further enhances our attractiveness as a
location of choice.
“A significant majority of the international insurers
licensed in Guernsey have their parent company
located in the UK. However, the island’s insurance
sector is truly international”