Mark Helyar discusses the new ILS structure under development in Guernsey, its motivation and why Guernsey is the ideal location for ILS
An innovative new structure is under development in Guernsey, which would allow both the fund and insurance element of insurance-linked securities (ILS) within a single structure. Leading the development is Mark Helyar, a Guernsey-based lawyer.
Captive Insurance Times spoke to Helyar about the new structure, its development, and why Guernsey is the ideal location for it.
Can you describe the new ILS structure you are developing?
This is a structure which utilises a limited partnership, similar to private equity fund structure, where the general partner company is licensed to conduct insurance business (typically in Guernsey this would be collateralised reinsurance).
The investor subscribes to commit capital to an ILS programme by the limited partnership and the general partner company conducts the insurance transformation on its behalf, within the same single structure. The limited partnership is not liable for the actions of the general partner (limited partnership liability is limited). The structure is tax transparent (the investor pays tax where they are resident).
The investor does not have to consolidate the limited partnership/general partner vehicle into its own accounts and the limited partnership would generally be an unregulated, private vehicle.
What is the motivation behind its development?
Access to ILS investment in this sector is typically driven by the acquisition of shares in a regulated collective investment scheme or fund. The fund must then use separate and separately regulated structures (often in another jurisdiction) to transform insurance risk into capital market risk, usually by accepting risk ceded from an insurer or reinsurer. The risk is usually completely collateralised—a $25 million risk is covered by $25 million of capital, held in an independent trust account for the benefit of the reinsured during the period of cover (usually a single year).
The current market structure is costly (double regulation, double audit, double governance structures, double administrators), inefficient, and lacks governance and cost transparency.
It is far more efficient and cost effective, as with this new structure, to conduct the investment and ILS transformation in a single entity based in the same jurisdiction, with a single set of administrators, auditors and directors.
When will it be launched?
There is no requirement to alter existing regulations in order to accommodate this activity—the existing law and regulations in Guernsey already provide discretions for its approval, and we have a substantial investment fund market and insurance management market to provide the professional support.
Clients are already in the later stages of formation. I anticipate we will see some form of guidance from the regulator in due course but this doesn’t require new legislation, it’s a new idea using existing, tried and tested structures. The limited partnership is well known in the funds industry, less so in the insurance sector.
What impact do you predict it will have on the market?
Large investors seek investment in pure, non-market correlated risk. They also typically do not want to invest passively via a large investment fund. This structure is therefore a game-changer for most substantial ILS investors.
They will have better transparency and lower costs, and therefore will see enhanced returns when compared to the current fund and ILS transformer model.
Who is the structure aimed at?
This is not a retail investor structure, it will be used by large pension funds who are already familiar with the market and perhaps by ultra-high net-worth individuals family offices who invest in ILS to provide portfolio diversification.
ILS is typically a small part of a much larger and wider portfolio. The regulator will wish to ensure that there are sensible safeguards so that investment cannot be offered to retail investors (typically by requiring a high minimum investment limit). This is entirely sensible–widows and orphans shouldn’t be betting on hurricanes.
Other than yourself who is developing the structure?
I have heard of other people talking about it in recent months (for example at the Asian ILS conference), but I have been mooting the structure now for some time and banging the drum for Guernsey as the ideal place to conduct this activity.
In recent months investor concerns over transparency, costs, and margins, as well as wishing to retain active rather than passive investment control, have caught up and the structure is now being implemented.
Guernsey is the ideal jurisdiction in which to conduct this activity, as unlike other leading offshore insurance or ILS jurisdictions, we also have a very large and diverse investment fund industry. This means that the Guernsey regulator and the administration industry is familiar with both insurance and investment sectors and their structures. We have found the Guernsey regulator’s innovation unit to be very responsive and adaptable—development requires two regulatory units (investment and insurance), which in many jurisdictions are contained in entirely separate silos, to communicate and cooperate.
