ILS collateral rollover rule formalised at 30 days by Guernsey regulator

Insurance-linked securities (ILS) cells established in Guernsey will benefit from formalised collateral rollover provisions, including confirmation of a 30-day grace period at the start of a transaction where an ILS cell would not be considered in breach of its fully-funded requirements.

The Guernsey Financial Services Commission (GFSC) has clarified and formalised certain issues relating to collateral rollover and the authorisation process for ILS cells, following talks held with the Guernsey International Insurance Association (GIIA).

The issue of collateral rollover at the beginning of a transaction or its renewal has long been highlighted as a potential concern for the ILS market.

The potential for a major catastrophe event to strike on January 2nd when collateral has still not moved into the correct trust accounts to support new reinsurance or retrocession agreements and the fall-out this could result in has always concerned fund managers, investors and cedants.

The fear was that if such an event occurred, many of the ILS cells or structures would not yet be fully funded, as it can take time for collateral to be shifted between trust accounts, resulting in concerns among cedants over whether claims would be honoured and which cells would have claims on the collateral that was supposed to be backing their reinsurance or risk transfer arrangement.

Guernsey has responded by formalising rules around this, including the provision of a 30-day “grace period” for the application of collateral, which applies both at the formation of new Special Purpose Insurer (SPI) cells, as well as in the renewal of deals in SPI cells, often referred to as rollover.

Katherine Jane, Director of Risk and Financial Stability at the GFSC, explained in a letter written to the GIIA that the Commission accepted that the timing between a special purpose insurer committing to a collateralised reinsurance transaction and the point at which the trust account is fully funded, could be different and that this is a commercial decision for the ILS sector to take with the full knowledge and acceptance of the cedants involved.

As a result, the GIIA has agreed to the provision of a 30-day period at the start of a transaction, including its renewal, where an ILS cell would not be considered to breach its fully-funded requirements if the collateral was not in place yet.

Clearly the legal documents surrounding an ILS transaction and the agreement between ILS fund and cedant will need to lay this out, to ensure that were a claim to be made on the collateralised reinsurance arrangement within this grace period it would be honoured.

“We raised a number of regulatory matters with the Commission which we believed would make ILS in Guernsey even more attractive to our global client base and we very much welcome this move,” commented Peter Child, Managing Director of Artex Risk Solutions in Guernsey and chairman of GIIA’s Market Development Committee.

“We already believe that Guernsey holds a number of advantages as an ILS domicile, including the breadth of our funds and insurance knowledge, our status outside Solvency II, our experience and, as proved here, the responsiveness of our regulator,” he continued.

Flexibility is important to ILS players when they look for a regulatory environments to work in. This formalisation of the collateral rollover rules will benefit both ILS fund managers for who renewals can be a rushed experience of trying to get collateral in place as quickly as possible, as well as cedants who will feel better protected with a formalised grace period.

Dominic Wheatley, Chief Executive of Guernsey Finance, added that this regulatory move would be well received in the international insurance and ILS industry.

“A responsive regulator is an important contributor to the success of our supportive business environment.”