ILS market powers forwards

A spate of natural catastrophe disasters in 2017 has done little to halt interest in Guernsey’s insurance-linked securities (ILS) market.

Disasters striking North America last year including wildfires, severe weather, tornadoes and hurricanes Harvey, Irma and Maria, are estimated to have cost more than £300 billion ($388 billion).

The ILS industry in Guernsey is seeing significantly increased business flows for the year to date in 2017, a year when its industry saw overall net growth of 2.2 percent and top line growth of 10 percent.

“There was a theory that when we had a bad claim year then investor interest might wane somewhat, but we had a bad claim year last year and—quite unexpectedly in some quarters—investors have reloaded and actually increased capacity in the industry, and we’ve seen that continue with a lot of renewal activity and new business in 2018,” said Dominic Wheatley, chief executive of Guernsey Finance, the promotion agency for the island’s finance industry.

“The long-term trend has been for significant growth. You only have to look at the relevant statistics for the industry to see that we’re significantly growing and developing in an exponential way. It’s a long way from plateauing—we are still in the growth phase of a relatively new industry.”

Wheatley said he expected interest in the market to continue to develop.

“The demand for North American cat cover is not going to drop off any time soon. The demand is at both ends of this structure, from the investment end and the reinsurance end, and I can’t see any reason for demand not to increase.

“If we’ve got an effective product that delivers what investors and the reinsurance market are looking for, it’s difficult to see why it won’t continue to be successful.”

Underlying structures

Wheatley said that Guernsey has a slightly different ILS industry from Bermuda’s in that the latter has a lot of cat bonds, sidecars and similar arrangements, whereas Guernsey is pretty much exclusively collateralised reinsurance arrangements. The underlying structure is different but the nature of the business being written is still North American catastrophe reinsurance.

Wheatley said that technology was playing its part in driving growth in the industry. Guernsey lawyer Mark Helyar is pioneering the development of a single structure for conducting the fund and insurance elements of ILS business, while ILS manager Cedric Edmonds, who has used Guernsey to establish ILS structures for nearly a decade, has introduced listing and the use of blockchain into the sector from the island.

“We’re pretty confident that these and other innovations we are looking at are going to see a continuing increase in the amount of business we are doing,” he said.

“We are a naturally innovative environment—the cell technology that all ILS is based on was developed in Guernsey in the 1990s. That innovation is part and parcel of being a successful offshore jurisdiction, particularly in the insurance world. We’ve had to go out and find new lines of business such as ILS and pension longevity structures, another area where we have innovated and are leading the market.

“2017 was a good year, but as an investment ILS is obviously growing and becoming more popular. The collateralised reinsurance model offers exactly what investors are looking for in terms of the clarity and the relatively short-term duration of their commitment,” Wheatley said.

“There is also the liquidity issue—it does have that countercyclical element that investment portfolio builders are looking for, but as a risk profile this doesn’t fit into a business cycle. It’s a completely random event, so therefore it’s useful from an investment portfolio-building viewpoint.”

Wheatley said that the more technical nature of collateralised securities also fitted the island’s skillset very well, while the development of the sector from London had been a natural fit for the island given its continued strong business links with the City.

“The cat bonds which originated out of New York gave Bermuda the opportunity to establish itself as a centre of excellence in that area, and similarly the fact that these collateralised reinsurance transactions were being put together in London gave us the opportunity there.”