The Crown in the Channel

The Crown in the Channel

Guernsey’s insurance-linked securities (ILS) sector believes it can work closely with the developing market in London as the island looks to shore up its place in the global insurance industry.

The CEO of Guernsey Finance, Dominic Wheatley admits ILS is a niche area, but, as he told Reactions recently in London, really niche areas are what Guernsey does well.

The island hopes London and the ILS legislation it introduced in late 2017 will come knocking and form a closer, reciprocal relationship as Guernsey seeks to steady itself in the international markets, and avoid any further association with the dreaded “tax haven” description.

“We already had a robust, competent team in Guernsey when ILS became a product in the market,” he says. Wheatley explains that Guernsey is a “microcosm of the London market” and offers many of the same services and knowhow at the same skill level, just on a smaller scale.

This is a view shared by Peter Child, chairman of the Guernsey International Insurance Association’s (GIIA) market development committee.

“London could be seen as complementary to Guernsey’s ILS sector,” he said at a recent event. “While there is political will to see the London ILS offering thrive, maintaining its insurance sector's reputation as a full-service centre capable of delivering a full range of insurance and reinsurance services, it is clear that the ILS sector is developing fairly slowly.”

ILS business in London has been slow taking off to date, but that has not been the case in the crown dependency which has long been a centre for international finance.

Guernsey sees itself as a rival to the likes of Bermuda primarily, and to a lesser extent its neighbour Jersey, and then the Cayman Islands.

But, as Wheatley was keen to point out, these jurisdictions all do different things in the world of international finance; banking, hedge funds, asset managers, and sovereign wealth funds to name a few. All of these areas have their own capabilities, and ILS has become Guernsey’s.

“Nowhere else can match Guernsey's combination of funds, trust and insurance management expertise, and its ability to deliver bespoke complex products with consistent high quality,” Child said in a recent report.

“Following the claims of 2017 the market is strengthening and we are seeing real signs of the permanence of ILS as a key part of the reinsurance market. We are also seeing new capital coming to the market and hearing about innovative structures and business models that are innovating all aspects of the ILS value chain.”

Wheatley says it is the “diversity” of the finance industry in Guernsey that acts as its strength. ILS has already been established on the island for over a decade, with Aon and Credit Suisse the first big customers back then.

Child also thinks Guernsey offers a number of promising ideas.

“We believe that Guernsey still holds advantages – the responsiveness of our regulator, our experience in the sector, the breadth of our offering in the funds and insurance space, and our status outside of Solvency II.

“Although London is nominally a competitor, if London can make a contribution to drive forward the growth of the ILS market, we think that should be good for all involved.”

 

Positive signs

Guernsey has already seen a positive start to the year in the ILS market. Statistics for new protected cell companies (PCCs), the main method of writing new ILS business, are well ahead of those for 2017 to date.

Industry figures show flows, from both established and new clients, have been strong in 2018 with the industry seeing overall net growth, including ILS, of 2.2% in 2017, and top line growth of 10%.

The total number of international insurers in Guernsey stood at 853 at the end of 2017, with more than half (57%) represented by PCC cells, which Derek Maddison, chairman of the GIIA, said reflected the island’s strong position in ILS.

Maddison added one driver for the industry was the increasing number of natural catastrophes for which people are seeking cover.

“Some of these risks can be difficult to place in conventional insurance markets,” he said. “There may not be enough capacity or the insureds may want a particular trigger to be used instead of proving an event in the conventional insurance sense. There is also a growing appetite among the institutional investors to diversify into such risks.”

Guernsey was the first jurisdiction to establish legislation permitting the formation of PCCs more than 20 years ago. Recently the Guernsey insurance industry has been considering establishing entities combining insurance and investment activity in one vehicle.

It is hoped this could present significant efficiencies for ILS fund managers. Wheatley also believes it shows an exciting time for ILS.

“International fragility and uncertainty are on the rise and innovation in the market. The ILS sector is rapidly developing.”

 

Future changes

With that uncertainty, Wheatley knows the future of insurance is up in the air, but ILS is a good place to start when considering the industry’s evolution, but no one knows whether it will be the golden goose.

There are always areas for improvements, Wheatley says, and he sees several opportunities in ILS that could help drive its efficacy and fungibility.

These include:

  • Clarified renewal periods; products that must be classed under two products during renewal periods should be simplified and more widely publicised to avoid potential confusion for customers;
  • Address all accounting issues that currently streamlining and profitability;
  • Introduce blockchain products for ILS;
  • More pensions protections on products.

On top of this, Guernsey Finance also expects connections with London to grow further with the confirmed appointment of its new representative in the city.

Adrian Norman took up a position with Guernsey Finance to help strengthen the bond between the two hubs. He will be permanently based in London with a remit to further promote awareness of the island’s offering, to educate about the financial services, and to connect London professionals with Guernsey practitioners.

Norman has worked for firms such as Credit Suisse, Northern Trust, Carey Group, Ogier and Odey Wealth. His role at Odey took him to London in 2014, where he was head of operations with Odey Asset Management, and he has experience of working with funds domiciled in multiple jurisdictions.

“Having built up experience working across various sectors in both Guernsey and London, I feel I have a good grasp on the needs of both jurisdictions and the areas where they could work together for mutual benefit,” he said at the announcement of his appointment. “I am looking forward to help grow Guernsey’s connections with the capital.”

With the world’s insurance markets hesitant about their future, Guernsey is keen to stake its claim as a reliable place to do business, whilst this level of flux is creating opportunities. The island is also keen to highlight its regulatory and compliance nous as a way to combat the rumblings of the fallout of the Paradise, Panama and other papers that have seen eyebrows raised in many governments.

Wheatley and the rest of the Guernsey finance sector know where the wind blows, and are keeping their eyes firmly trained to London.

“Our longer-term future is founded upon our uniquely symbiotic relationship with the City as a major capital provider and a conduit to other economies,” he says, but only time will tell.

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