Carey Olsen partner Christopher Anderson recently introduced the concept of a hybrid vehicle for use in the insurance-linked securities (ILS) industry. Here, he explains how and why he came up with the idea of the world's first ILS hybrid.
As is often said, the best ideas are always the simplest. That is reassuringly accurate for the introduction of the world's first hybrid vehicle for use in the ILS sector.
The ability to utilise an all-in-one structure that can act as both re/insurer and ILS fund has existed in Guernsey's regulatory framework for some time, but the concept had never been fleshed out in practice.
That, however, all changed at the beginning of April when the Guernsey regulator, the Guernsey Financial Services Commission (GFSC), confirmed that it was happy to receive applications from mixed purpose protected cell companies containing both investment and insurance cells. This enabled the creation of an ILS fund hybrid, something no other jurisdiction in the world can currently match.
The Guernsey hybrid is a protected or incorporated cell company that is both a licensed insurance company and a regulated investment fund. It means ILS managers will no longer have to 'rent' cells of protected cell or segregated account companies to act as Special Purpose Insurers (SPIs) and which are often established in a different jurisdiction and operating entirely separately from the ILS manager's fund.
In the absence of the Guernsey hybrid, managers ‘rent’ cells of protected cell or segregated account companies as SPIs to acts as ILS transformation vehicles. Those SPIs invariably operate with a different board of directors, different service providers and a different auditor from the fund and may even be in a different time zone. The purpose of the Guernsey hybrid is to bring those SPIs and any number of sub-funds together in one vehicle, in one place, supervised by one regulator, governed by one board of directors with one set of service providers and one auditor.
Guernsey is a world-class investment fund domicile, a global specialist in private equity, listed debt and alternative assets. It is also a world-class insurance domicile and one of two key players in the ILS transformation market. Many ILS fund managers already use Guernsey as a home for their SPIs. Consequently it seemed obvious to me that Guernsey ought to be an ideal choice of jurisdiction for establishing ILS funds. That, in turn, led me to thinking that fusing the fund and the SPI structure into one vehicle would generate significant cost savings and other efficiencies as well as greater control for ILS fund managers.
Dominic Wheatley, Chief Executive of Guernsey Finance, the promotional agency for the island’s finance industry, agrees.
“As the asset class grows we see Guernsey’s role in it growing too,” he said. “Guernsey will continue to be at the forefront of innovation in ILS and this is a perfect example of forward-thinking, building on our expertise in ILS, insurance and funds.”
One of the key hurdles in developing the hybrid was ensuring the regulator was comfortable with the concept. This progress was made simpler because the GFSC already had a wealth of experience of regulating investment funds, including ILS funds, and of supervising ILS transformation vehicles.
As a licensed insurer, the hybrid must maintain minimum share capital of £100,000 for a general insurer and £250,000 for a long-term insurer. This can be achieved through the issue of shares in the core of the company – shares which could be held by the ILS manager itself or by investors.
If fully collateralised, the insurance cells will not be subject to any additional solvency or capital requirements. The hybrid will also be eligible to utilise Guernsey's SPI Rules that enable insurance cells to be licensed instantaneously.
As with all Guernsey regulated funds, the hybrid is expected to appoint a Guernsey licensed fund administrator which will provide administration services to the investment cells. The hybrid is eligible to take advantage of Guernsey’s fast-track fund approval regimes meaning it could be regulated as an investment fund in as little as three, or even one, business day. The hybrid may also appoint a Guernsey-licensed insurance manager which will provide insurance and administration services to the insurance cells.
The invention of the Guernsey hybrid builds on Guernsey’s expertise in insurance, ILS and funds. Although the hybrid concept is unique, I am confident it will be attractive to ILS fund managers.