Nick Wild - Chairman Guernsey Insurance Forum Reinsurance and Capital Markets Convergence

1 Capital markets & reinsurance Capital markets & investors want to access insurable risk an alternative investment either because of very attractive returns or because it is an uncorrelated form of investment risk The 2005 US Windstorm season created some exceptional returns for investors in the 2006 hurricane season and spawned the “Sidecar”

2 Capital markets & reinsurance “Sidecars” were ISPV that covered a single risk with investors providing funding They were the best publicised example of convergence but actually a lot of activity is going on below the radar screen There is a substantial market for Insurance Linked Securities that is growing and USD13bn of Cat Bond issuance in existence

3 Capital markets & reinsurance Investors are said to have available more than 10 x the capacity that is being taken up After Sept 08 financial melt down who knows what appetite If market hardens Insurers or reinsures may seek to find new capacity or alternatively priced capacity

4 Case study 1 – a one off transaction 2008 Hurricane Season A London insurer XYZ wished to purchase USD25m of Cat protection for a book that was exposed to US Windstorm They looked at the price of conventional market and it was not attractive They considered the purchase of a Hedge from the capital markets

5 Case study 1 They have looked at purchasing an Event Linked Future (ELF) on the Insurance Futures Exchange IFEX in Chicago The 2 nd Event ELF for US windstorm on IFEX has an attractive price, structure and security Problem is that the instrument they would purchase is not reinsurance and would not be accounted for as required

6 Case study 1 The insurer needed to effect a transformation of the ELF into a reinsurance contract The transformation needed to take place in a vehicle which is not part of XYZ A Cell in a Guernsey PCC was available to effect the transformation

7 Case study 1 The Cell would purchase the ELF which would provide USD25m of capacity to pay in the event of a Windstorm with a given trigger The Cell would issue a reinsurance contract to XYZ that provides the same capacity and trigger at a price equal to the ELF plus a margin to cover the PCC operating costs

8 Case study 1 A Cell can be created by resolution of the board The Cell business plan must be approved by the GFSC The Cell was not required to have capital as the ELF provides the funding with which to meet the liability under the reinsurance contract & the PCC Core meets the minimum capital requirement

9 Case study 1 Cost of the transaction would be the price of the ELF plus the PCC facility fee which would range from GBP25k to 50k depending on the detail of the transaction A key element to the transaction is the documentation for both sides of the contract and this is where the PCC facility fee can rise depending on how complex the documents become

10 Case study 2 – multiple transactions ICAP/ JLT Joint venture formed with ICAP in 2007 to broker (re)insurance linked financial instruments A focal point for convergence between the (re)insurance and capital markets To provide alternative capital to (re)insurance clients - and to enable investors to access (re)insurance exposures

11 Case study 2 – multiple transactions ICAP/JLT is an interdealer broker Client base:120 reinsurers, banks and hedge funds A volume business trading Cat Swaps on ISDA form contracts typically for Windstorm or Quake risks

12 Case study 2 – multiple transactions Three types of deal being done –A) Financial Institution to Financial Institution –B) Financial Institution to Reinsurer or –C) Reinsurer to Financial Institution B) & C) need transformation

13 Case study 2 – multiple transactions A Guernsey PCC facility has been established to provide the transformation for B & C type transactions GFSC has provided approval for the form of the contact and a batch of 20 Cells that may conduct this business The documentation is in a standard for for both ISDA and Reinsurance contracts

14 Case study 2 – multiple transactions The arrangement has been established so that deals can be concluded quickly and with low frictional costs The parties accept terms and then each transacts with a Cell allocated for the specific deal Time line from agreed terms to signed contracts max 5 days Cost of transformation USD 6,000

15 Guernsey – as a Financial Centre 47 banks holding deposits of USD250bn Fund Management sector assets USD 385bn Fiduciary business holds funds of USD 400bn 600 Captives and Cells Insurers: Barbican – Catlin –Generali- Hiscox -RSA SPV’s: Hannover Re - -SCOR

16 Guernsey offers Thorough but commercially aware regulators High quality infrastructure Speed to market Zero tax Proximity to Europe and time zone

17 Commercial infrastructure All major audit firms present Excellent law firms Investment Managers Actuarial services Channel Island Stock Exchange recognised by London and NY

18 Insurance Managers 30 licensed by GFSC – broker owned and independent Services offered:- –Underwriting –Claims –Accounting &Treasury –Company Secretarial &Compliance Protected Cell facilities offering Transformer and ISPV services

19 Regulation Very high quality & internationally recognised Guernsey lead the way in implementing international standards GFSC well recognised/understood by the FSA & IAIS Guernsey working towards recognition by EU Insurance Regulators