As the insurance-linked securities (ILS) market continues to expand the need for new structures and increased efficiency is growing across the sector, a trend that has seen the island domicile of Guernsey push for the development of a more transparent vehicle for investors that supports “true convergence” in ILS.
Artemis discussed previously how speakers at the Guernsey Finance ILS Insight event, held recently in Zurich, highlighted a desire to drive further ILS growth via the development of an all in one legal entity that could combine insurance or reinsurance and investment activity in one vehicle.
And now, the organisation has revealed that a new single structure for conducting the fund and insurance or reinsurance element of ILS business is being developed in the domicile.
Insurance lawyer, Mark Helyar, commented on the development of such a structure while addressing an audience at the event.
“As the market has grown the need for more structures, and more efficiency, has become more of a pressure. There is evolution – things are changing all the time, and new structures are appearing regularly as we are always trying to think of new ways to do things more efficiently.”
Helyar is directly involved in the development of the new structure, which he described as a “Fund of One”, where investors would set themselves up with an unregulated investment fund as well as their own reinsurance transformer cell.
Ultimately, this could remove the need for multiple vehicles, often a cell or a reinsurer, alongside a fund structure, which would see ILS arrangements, such as a sidecar for example, to have both the risks and the assets held in a single vehicle.
“This is the way I think investors want to see the direction of travel – more control, reduced costs, both vehicles in the same jurisdiction, variable capital commitments brought in and out, and you can see exactly what you are doing,” said Helyar.
He added that a model such as this eliminates challenges of frequently doing business in various jurisdictions, regulation, time zones, account rules, audit, and also additional layers of administration expenses.
“There is a big circle and everyone in that circle is taking a cut. Investors have difficulty understanding where the value is in the chain, it is difficult to understand the process, and particularly when you get a year of natural disasters like last year, people start to ask questions. It occurred to us and to clients that this kind of approach doesn’t suit them. They want to clearly control the deals they are doing,” said Helyar.
The experienced insurance lawyer explained that he believes this type of structure will gain popularity with large investors who perhaps don’t want to be treated like a private investor, as it offers full transparency, a reduction in duplicated costs through the value chain, as well as providing an opportunity to work with their choice of co-investors.
“I am quite excited by this – in talking to regulators we are doing two things here which are usually done in silos – investment and insurance divisions often take a different approach to risks.
“We have one of these on the starting blocks at the moment – a transformer and fund in the same vehicle. I’d like to see people considering this type structure in the future, it is an excellent vehicle to demonstrate transparency for investors, and good thing for Guernsey,” he said.
Dominic Wheatley, Chief Executive Officer (CEO) of Guernsey Finance, who opened the event, commented: “We’re proud that Guernsey offers a combination of stability, expertise, and receptiveness to new ideas that makes us uniquely able to facilitate innovation as it emerges in this space, and our commitment to maintaining this environment is clear and unwavering.
“It is important to have a committed and engaged investor community if you are going to have a sustainable investment product. I take this as a sign of a properly mature market, and demand for the product and innovation in the industry bodes well for the future.”