Guernsey expands ILS regulations, with SPI vehicle for cat bonds & more


Guernsey has updated its insurance-linked securities (ILS) rules in order to clarify the regulatory treatment of collateralised reinsurance transactions, add a full-featured SPI structure that can support catastrophe bonds and sidecars, and to speed up the approval to a one-day process.

The Guernsey Financial Services Commission (GFSC) has published the new rules to enhance and speed up the process for doing insurance-linked securities (ILS) business such as collateralised reinsurance and cat bonds on the island.

From 1st January 2017, under the Insurance Business (Special Purpose Insurer) Rules 2016, applicants looking to license a new Special Purpose Insurer (SPI) can be granted a single consent allowing them to form further SPI’s in future without the need for repeat applications to be made.

This could be extremely useful for those firms which like to use SPI’s for single transactions, or for whom even a shelf program type set-up is not sufficient to cope with the volume of deals. As the ILS market grows being able to quickly and efficiently set up new SPI’s will become increasingly important.

Additionally, the newly streamlined application process will typically enable applicants to have their new special purpose insurers established within one business day.

Guernsey’s Insurance Business (Solvency) Rules 2015 have also been updated to include the new class of insurer. The new rules also state that an SPI is not required to maintain minimum or prescribed capital requirements, or to conduct its own risk and solvency assessments.

Guernsey Finance Chief Executive Dominic Wheatley commented on the announcement; “These positive changes are a codification of the way the GFSC already applies its discretionary powers and they provide a new level of operational certainty and efficiency for the insurance sector.

“This sort of development highlights Guernsey’s ability to find sensible, proportional regulatory responses to the necessary but growing compliance burden on financial services organisations which we are confident will appeal to others considering ILS structures in particular.”

SPI’s established in Guernsey have to be fully collateralised to the extent of their liabilities and can be utilised for a variety of insurance-linked security (ILS) transactions, including collateralised reinsurance, catastrophe bonds, reinsurance side-cars and life insurance securitisations.

Guernsey already has a strong market in collateralised reinsurance deals using cell vehicle structures, but adding an SPI with the flexibility to be used for a range of ILS transactions should help to increase the domiciles attractiveness for a wider range of sponsors and ILS investors.

SPI’s will typically be cash collateralised under the new rules, however, the changes also allow for counterparties to satisfy collateralisation requirements using (re)insurance, letters of credit or partly paid shares.

Insurance lawyer Mark Helyar, Of Counsel at Bedell Cristin, commented on the joined-up approach taken by Guernsey’s insurance sector and the GFSC in developing the new rules, saying; “Collaboration between industry and the regulator meant that we could deliver this new legislation rapidly,” said Mr Helyar.

“These rules will provide a significantly enhanced transparency to the manner in which Guernsey’s regulator approaches the supervision of collateralised reinsurance structures and demonstrates Guernsey’s equivalence of approach to Bermuda as an alternative jurisdiction for ILS within the European time zone.”

The update to Guernsey’s ILS rules brings it more into line with the range of structures and transactions supported elsewhere. It also means that Guernsey has a full-featured set of SPI rules enacted in advance of London’s ILS rules being completed, which could help the domicile to attract European business.

As ever, with financial regulations for vehicles such as SPI’s, the devil will be in the detail or ensuring that the new rules support the features that the market requires. But as a step forwards for Guernsey’s ILS market having the ability to host transactions from catastrophe bonds to sidecars can only be a positive for the domicile.

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