Breakout Session 3 Tomorrow’s growth area? Sponsored by Speaker Mark Helyar - Bedell Group

Tomorrow’s Growth Area ? GICMA Conference, March 2007 Breakout Session 3 Mark Helyar – Partner Bedell Cristin, Guernsey

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 $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

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