Guernsey sees increased collateralised reinsurance and ILS business

by Artemis on January 23, 2014

The latest insurer registration figures from the Guernsey Financial Services Commission (GFSC) show that the domicile has continued to see an increase in the formation of protected and incorporated cells, many ILS related, in 2013.

When Artemis last reported on the growth of insurance-linked securities (ILS) activity in Guernsey last August, the island had licensed 46 new international insurance entities during the first half of the year. By the end of 2013 that number had increased to 89, consisting of 10 new limited companies, 6 Protected Cell Companies (PCCs), 63 PCC cells, 2 Incorporated Cell Companies (ICCs) and 8 ICC cells.

That took the total number of international insurance vehicles licensed in Guernsey to 758  by the end of December 2013, consisting of 242 limited companies, 69 PCCs, 414 PCC cells, 7 ICCs and 26 ICC cells. This compares to a total of 737 international insurers which had been licensed by the GFSC at the end of December 2012, which means the island saw net growth of 21 entities during the year.

Fiona Le Poidevin, Chief Executive of Guernsey Finance, said that a significant number of the licences issued in the last year were associated with a variety of structures related to insurance-linked securities (ILS).

She commented; “It is pleasing to see that Guernsey remains a popular international insurance centre. These figures build on last year’s very strong performance and together mean that nearly 200 international insurance entities have been licensed in the Island during the last 24 months. The increases continue across the different types of entities, although there is particularly strong growth in PCC and ICC cells and especially in relation to ILS structures.”

Artemis was told by Guernsey Finance that between two of Guernsey’s independent insurance managers who deal with ILS vehicles, Robus and Aon Captive and Insurance Managers (Guernsey), more than 40 new ILS related entities were formed in 2013.

Justin Wallen, Managing Director of Hexagon Insurance PCC Limited, Robus’ protected cell company which facilitates ILS trades told Artemis; “All of my 22 ILS structures created in Guernsey in 2013 are protected cells in various Protected Cell Companies under the Hexagon PCC Group umbrella and they are being used to conclude fully collateralised reinsurance contracts (sometimes known as private trades) in the non-life space.”

“Each cell enters into an excess of loss/aggregate/quota share reinsurance policy for various covers such as property (natural and non-natural perils), marine, energy, crop, premium reinstatement, prize indemnity etc and the cell is fully funded by the investing ILS fund up to the amount of its maximum obligation under the reinsurance contract. We tend to collateralise using either an RTA out of New York or occasionally a letter of credit out of Guernsey but either way its fully funded risk,” Wallen explained.

Wallen also told Artemis that a number of collateralized ILS transactions were completed in 2013 which saw ISDA contracts being used as an alternative to a reinsurance contract, demonstrating the breadth of the collateralized reinsurance and ILS business being undertaken in Guernsey now.

It’s not just property catastrophe risk transactions being structured, transformed and collateralized in Guernsey either, life securitization continues to be transacted on the island.

Aon Captive and Insurance Managers (Guernsey) has also found ILS related registration enquiries have increased in the last year. John Rowson, Executive Director, told Artemis; “In 2013 we saw ILS related entities created predominantly for collateralised reinsurance, but also for the securitization of life insurance premiums.”

Guernsey’s location, experience in insurance and reinsurance and large investor community has helped to boost interest in ILS.

Fiona Le Poidevin continued; “Guernsey’s international insurance expertise, our close proximity to both London and Zurich and our access to major global capital markets mean that we are increasingly viewed as a centre of choice for ILS. We are looking to build on this during 2014 through a number of different marketing and promotional activities which will highlight that Guernsey not only has a particularly experienced insurance sector but also a large investment funds community so is able to bring together both sides of the ILS equation.”

Guernsey facilitated a ground-breaking deal in the last year, with the first insurance-linked securitization (ILS) of takaful (Sharia’a-compliant) insurance policies in the Salam III Limited securitization of in-force life insurance policies, which was transacted as an Islamic bond, or Sukuk. The first tranche of this deal was issued in October.

Law firm Bedell acted as Guernsey counsel for the Salam III deal, working alongside the European Islamic Investment Bank, Rasmala Group and legal firm Morgan, Lewis and Bockius. Aon Guernsey acted as the insurance manager and a primary listing for the notes is being sought on the Channel Islands Securities Exchange (CISE).

Paul Sykes, Managing Director of Aon Guernsey and Chairman of the Guernsey International Insurance Association (GIIA), stated; “Guernsey continues to provide an attractive environment for establishing a wide variety of international insurance entities, including ILS structures, and we see significant opportunities for growth in the management of Sharia compliant insurance products. Of particular importance is our regulatory regime which continues to respond to innovative proposals while also offering proportionality through meeting the insurance core principles of the International Association of Insurance Supervisors (IAIS).”

It’s interesting to see the way that different domiciles have developed in reaction to the growth of the ILS market. Guernsey is clearly doing good business in the collateralized reinsurance space and to facilitate the use of cells by ILS funds and investors. Will we see a catastrophe bond transaction brought to market by a Guernsey based issuer one day? It is entirely possible as the overall ILS market grows and the increasing choice of domiciles brings new opportunities to sponsors.

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