05 December 2014

Financial Times: Insurance innovation and expertise drives traffic into Guernsey

Mention Guernsey and insurance in the same breath and people usually think of captive insurers, a risk management tool by which companies self-insure part or all of their risks without recourse to traditional markets.

Today, the island is Europe’s leading captives domicile and the fourth-largest in the world after Bermuda, the Cayman Islands and Vermont. But the real growth in recent years has been in “alternative risk transfer” products and in particular the insurance-linked security or ILS. The elegance of ILS products is that they bridge the gap between insurance and capital markets, their value driven directly by insurance loss events, making them attractive to investors seeking returns uncorrelated to the overall stock market.

“For investors, this is a pure insurance play,” says John Rowson of Aon, the island’s largest insurance manager. “ILS are a genuinely diversifying asset class.” Although ILS has traditionally been operated from Bermuda, there has been a drive by London law firms and sponsor insurers to focus on Guernsey as a jurisdiction. Under Guernsey law, there is no risk of insolvency with ILS, as loss cannot exceed the level of exposure.

“This is classic Guernsey. All we’re doing is marrying up people in different jurisdictions and different places,” says Chris Le Conte, founder of Robus, an independent insurance manager. Aon and Robus accounted for almost all the 100 ILS deals in the past year.

Kate Storey of lawyers Appleby, which advises on the deals, believes the ILS market plays to Guernsey’s strengths. “You have the full range of financial services providers,” she says. “Custody, investment services, fund services and insurance services.”

Guernsey has always had a talent for innovation. Its regulator, the Guernsey Financial Services Commission (GFSC), was a founding member of the International Association of Insurance Supervisors, responsible for setting standards for 140 countries which account for 97 per cent of global premiums.

Guernsey was the first jurisdiction to introduce Protected Cell Company legislation in 1997, opening the market to smaller participants. In the UK, Guernsey PCC products have helped the social housing sector and the housebuilding industry. The legislation has since been copied by jurisdictions as diverse as Washington DC, Dubai and Malta.

Guernsey Finance, the industry body, points out that while the UK and the Cayman Islands account for two-thirds of new business, in the past 12 months the island has attracted clients from Ireland, Luxembourg, Switzerland, the US, Singapore, South Africa and Australia.

Not being part of the EU Solvency II regime, which sets high capital requirements for insurance companies, has probably spurred activity. “But we’re covering both bases,” says Chris Le Conte, who opened a second Robus office in Gibraltar, which unlike Guernsey is part of the EU and has to comply with Solvency II. “There are times we want to be in the EU and times we want to be outside,” he says. It is a comment that might almost be the leitmotif of Guernsey’s success as a financial services centre.

Full article on Financial Times (subscription required)

© Financial Times