Breakout Session 3

Tomorrow’s growth area?

Sponsored bySponsored by

Speaker

Mark Helyar - Bedell Group

Tomorrow’s Growth Area ?

GICMA Conference, March 2007

Breakout Session 3

Mark Helyar – Partner

Bedell Cristin, Guernsey

mark.helyar@bedellgroup.com

www.bedellgroup.com

Content

• Convergence of the insurance & capital markets

• A quick journey through jargon –

Side-cars, CAT and Longevity bonds,

• How could we achieve better convergence in Guernsey ?

• Value-added captives

• Summary & Questions

Convergence Characteristics

• Driving force – insurance market capacity &

catastrophic risk (Andrew 1992 - $16bn)

• Insurance markets in order of 1/8 to 1/10 the size of

capital markets in Japan, US, UK, Germany and

France

Some headline characteristics -

1. Trend towards financial services conglomerates carrying

out banking and insurance activities and sharing skills

2. Realignment of products “transcending” traditional

boundaries and categories – insurance risk as an

investment product

3. Securitisation of insurance and reinsurance risk

Convergence Characteristics – The Mirror Image

Underwriter

Risk assessment re

claims

Policy (guarantee)

Premium

Claims

Reservations

Reinsurance

Banker

Due diligence re non-

payment

Loan agreement

Loan

Repayments & Interest

Defaults

Securitisation

Jargon Busting - The Reinsurance Side-Car

Reinsurer CAT

Reinsurance

Investors

Jargon Busting - The Reinsurance Side-Car

• Substantial, single catastrophe risk reinsurance

• Ceding slices of seasonal reinsurance risk to “investors”

• Generally requires a licensed insurance vehicle

• Very suitable for rented PCC cell structures

• No risk-gap , very “low” risk business (regulatory)

• High potential investment returns –v- 100% investment losses

• Typical in Bermuda – has reportedly attracted growth in hedge funds

dedicated to investment in insurance risk

Jargon Busting - The “CAT” Bond

Reinsurer

CAT

Reinsurance

Bond Issue

Credit Rating

Investors

Jargon Busting - The CAT Bond, Characteristics

• Substantial, catastrophe risk reinsurers

• Raises capital through loans (bonds) to investors

• Does not require a licensed insurance vehicle for investors

• Complete insurance to capital market risk transfer (transformer)

• Can be designed to be traded, exchanged or assignable

• Typically more expensive to structure than a side-car

• Credit rating important for wider investment purposes

• Less volatile risk than side-car because can smooth out risk

and losses / gains of good / bad years

Change in Longevity

0.0

10.0

20.0

30.0

40.0

50.0

60.0

70.0

80.0

90.0

0 5 10 15 20 25 30 35 40 45 50 55 60 65 70 75 80 85 90 95

Age

% A

ttain

men

t

1981

2054

Jargon Busting - The Longevity Bond

Source – UK Government Actuarial Department, 2007

Jargon Busting - The Longevity Bond

SPV

Pension Fund

Mortality Index

BOND

Longevity Risk

Members live longer than index, bond pays out

Members die early, pension fund pays out from windfall

Jargon Busting - The Longevity Bond

• Key issue is transparent, independent indexing and

analysis tools

• Regulatory issues – the issue of financial instruments

by reference to mortality rates are classified as

insurance contracts in many jurisdictions

• Is this a financial or an insurance instrument or both ?

• If insurance, is the issue and sale of bonds also

classified as an investment product and therefore

subject to investment style regulation ?

• What are the effects of a secondary market ?

Longevity Bonds - The Potential Market

• 2006 Q3 net investment by self-administered pension

funds was £6.8 bn

• FTSE 100 companies pension shortfall in July 05 -

£37bn (based on FRS 17)

• Many observers believe that a market in longevity and

mortality risk will develop

• JP Morgan / Watson Wyatt / Cass Business School

announced “Lifemetrics” Toolkit for measuring and

managing mortality risk (Source: Financial Times 19/3/07)

Why Guernsey ?

• Internationally acknowledged, high quality, flexible

regulatory environment – risk based approach

• A premier league insurance domicile with managers /

administrators on hand to manage SPV activities

• Sophisticated financial services infrastructure in both

Guernsey (insurance) and Jersey (capital markets)

• Channel Islands Stock Exchange provides approved UK,

Europe and US status for listed securities with cost

effective, light touch regulation

• Numerous substantial domiciled investment / hedge

funds

How Could Guernsey Develop Convergence Business ?

• Cultural change – communicate better with other

financial service providers in Guernsey & Jersey to

develop awareness of capabilities of our insurance

industry and the opportunity for new business

• Cultural change – externally must be wary of reinforcing a

perception of Guernsey as only a pure “captive” domicile

• Look to develop better links with investment banks to

promote the jurisdiction as a suitable one for

development in convergence markets

• Develop accepted rating protocols for segregated cell

companies and Guernsey insurance SPV’s

The Value –Added Captive

1. Characteristic of the convergence market – multi-line &

cross-selling - not yet evident in Guernsey

2. Finance industry in Guernsey is delimited and silos exist

broadly along regulatory lines (insurance, fiduciary,

banking, investment)

3. Many other Guernsey products and expertise potentially

suitable for the captive parent or their executives &

employees

Examples of Potential Guernsey Benefits, Products and Services

• Employee benefit structures • Private treasury funds • Offshore (UK) recognised pension schemes • Sophisticated intellectual property protection & royalty

streaming• Group option hedging • Investment funds • Securitisation • Access to investment capital • Cheaper and more efficient financial assistance legislation for

mergers, acquisitions and holding structures

How Can Guernsey Develop Value – Added Captive

Business ?

• Education - develop awareness of capabilities and profile

of the insurance industry and the opportunity for

additional business amongst other sectors

• Raise and develop awareness amongst clients of other

potential Guernsey expertise and products

• Joint ventures, mergers and acquisitions

Summary – Common Themes for Growth

• Education – internal & external

• Sector convergence – joint ventures and product

development

• Regulation - mixed purposes

DISCUSSION

&

QUESTIONS