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brandon 0:03
Hello and welcome to the We Are Guernsey podcast where we bring you interviews with leaders from the global finance industry, as well as news and developments from guernseys financial services sector. My name is Brandon Ashplant and I'm Senior strategy and Technical Executive here at Guernsey Finance. Guernsey is a leading global finance centre. The success of the industry here is underpinned by economic substance political stability and asset security and we are committed to the cause of sustainable finance. To find out more about guernseys success in sustainable finance tune in to our sister podcast, the Sustainable Finance Guernsey Podcast. Today however, I am delighted to be joined by Mike Pickard, Director of Global ILS Insurance Linked Securities and Commercial Management at AON. Mike is based in Guernsey and has primary responsibility for the growth of AON Insurance Managers in ILS Commercial and Life Insurance across EMEA. So without further ado, welcome, Mike.
mike 1:04
Hi, Brandon, and thank you for inviting me on the podcast. So as you mentioned in your opening, my current role is as director of AON Insurance Manager so that's our Global ILS Commercial Management and life proposition. Where I'm currently focused on growing our EMEA book is our management capabilities in these areas of our business. So I also sit on a board of a few companies that we manage in Guernsey. These include sort of transactions for pension longevity swaps, and the Red Cross. So the entity that I spoke about last time I was here doing a podcast with with you all. So I'm lucky enough to have spent the majority of my career in Guernsey I started off working in audit with PwC, as many people seem to do so in the islands finance industry, under work for some great companies along the way worked with some great people and I've really been able to learn about all parts of the island sort of financial services sector, and such, I think, is the Guernsey standing expertise and breadth of services, particularly in the insurance space that is great that I'm able to get the exposure necessary to move into a global role without really having to leave the island of Guernsey. Outside of work, my life really is focused on around my family, my young son is eight year old. I enjoy sports. I'm a football coach, coaching my son's local football team. I used to say I'd never do another exam when I did my accountancy exam many years ago, but now seem to spend my time doing FA coaching badges and stuff like that. So it keeps me It keeps me busy through it. You know, when I'm not at work,
brandon 2:39
brilliant. Well, I guess we'll just jump straight into things, Mike, if that's okay? In Guernsey, we have sort of recently celebrated the 100 year anniversary of captive insurance in the island. And since then, Guernsey has gone on to grow into Europe's number one kind of captive insurance domicile if you'd like, I think more than 300 structures based now in the island. For those listeners who might be unfamiliar with the concept of captive insurance. Could you just talk through the history of captives and some of the benefits of setting up a captive insurance vehicle?
Unknown Speaker 3:13
Yeah, so as you mentioned, last year was a big year, in the world of captives, we had a couple of milestones, we had the 100 years of the captive where we did a big event in London for to celebrate that, but it was also 25 years of the PCC and with White Rock being established in 1997. So both both captives and PCs are now a big part of the insurance and finance, landscape world, you know, all over all over the place. So what is a captive so I guess in pure simplistic terms, a captain insurance company is a company that's set up to ensure its owner or shareholder. When I describe captives to people for the first time, I try and make it as relatable to everyday life as I can. If you own a house, right, you buy your house insurance, you pay your premiums every year just in case your house falls down. Now, in all likelihood, your house won't fall down and the insurance company makes a nice profit of your premiums. There's the same really applies in the corporate world, if you think the premiums you pay and likely to be greater than the claims you make them, why would you give your money to an insurance company. So, hence, corporate setup captive insurance companies to help find out so risks to these captures, they of course become more sophisticated these days they write a lot more than property risk, but the concept remains the same. So, if I look back at the history of the captive, as we saw from a currency perspective here, the first captive in Guernsey was established back in 1922. Hence the 100 year event last year and it was called Commercial Insurance Company Limited and what it was doing it was insuring the chain of properties for a chain of butchers now, at Aon when we moved offices a few years ago, we actually found the first company seal or stamp for that company that has pride of place in our office now, as you know, the first company seal from the first cap to being Guernsey, but it wasn't really until the 60s and 70s, that the captive industry that we know, now, today started growing. And as you mentioned before, we've now got over 300 entities registered in the here in the island. And I believe there's you know, around several 1000, worldwide across various domiciles all over the world. So, other than the simplistic example I use to around financing your risks, ensuring your properties to make a profit, there are other key benefits to setting up a captive. So with a captive, you can tailor the insurance coverage to meet your risks. So you can ensure what is your risk what is not on the basis of what is the risk for all other companies similar to you can reduce your cost of insurance, you can improve your cash flows. So you can include sort of flexible premium payment terms in your insurance agreements, you can retain investment income. So if you've, if you are collecting your premiums in your vehicle, these days, now interest rates are going up, you can start to make a little bit of a return there on those funds, you can ensure difficult risks that could be uneconomical in the traditional market. So new risks difficult risks, you may not be able to get a price that makes sense from a traditional insurance company because they they don't know the risk, they haven't got the data sitting behind it to give you an accurate premium price. And you can also reduce sort of market driven volatility in your insurance premiums. So keep your insurance premium relatively sort of smooth, as opposed to going up and down as and when events happen in the world. Now, another key reason to set up a captive is something that we quite often forget about is it it can actually help you identify risks, trends and problems within your organization. So if you go to capture if you've got a lot of data to hand in terms of claims, so on and so forth. And if you're a company that focuses on risk management, so it spends a lot of money, putting safeguards in place, making sure the trip and slip hazards aren't present, and so on and so forth. And having a captive means the losses are paid out of your own pocket as opposed to the market so, so that if you can reduce your losses, then you can decrease the level of claims. So if you do good risk management practices, your level of claims reduce, and that helps you as opposed to the insurance market to make to make those profits.
brandon 7:47
Brilliant. And that's a really great insight. I think for those who are less kind of familiar with the captive sector. I understand that AON has conducted a risk management survey, given the current state of the macro environment with stagflation and war in Europe and so on, what are some of the kind of emerging risks that that the survey identified as being sort of relevant to insurance?
Unknown Speaker 8:13
So, like you mentioned, we do a risk management survey every other year, where we send out a questionnaire to to our clients, and those people who are sort of responsible for buying insurance for for their groups or for their entities. Now, every time we do this, it becomes apparent that these risks, they're changing, they're changing at a rapid rate. So if we go back to, you know, 10-20 years ago, you were looking at property damage, business interruption, you know, what if your property burns down, and you can't make your things anymore? So how would you? How could you find that stat, but it's now changing, as I mentioned, now, the things at the top of the list are things like cyber risk, its brand and reputation. It's your supply chain, it's climate change its intellectual property, unsurprisingly, it is things like pandemic because, you know, after the COVID, so we call this the, we call this the sort of the big six at Aon. So these are the big six sort of new risks that we see. And where we see captives as being used more and more.
brandon 9:17
And how might these risks be managed for insurance industries and kind of a captive sector in particular?
Unknown Speaker 9:30
Well, I guess, as they're relatively new risks, there's not really an insurance product on the market to cover that and so you can't go to your mainstream insurer and say, can I buy a property against pandemic or supply chain or or whatever it may be. And as such, that means that's the perfect sort of thing for a captive because when you've got a captive insurance company, you can design your own insurance policy based upon the data and bits and pieces that you have to hand. And so therefore, you can design something that works for you that focuses on the risks of your group of your parent, and a price that works based upon what you know. So again, like I said about, if you're spending a lot of money on improving risk management, then you can factor that into your premium, that you charge your captive, as opposed to, if you were going to the market where if you went to a traditional insurer, they wouldn't know, wouldn't care necessarily what you're doing in the background. So that's where we see sort of captives being used to manage these risks, in particular, what we also see as well, it's like we said, If a traditional insurance company doesn't want to sell you a policy like that, because they don't have sufficient data, they don't understand the risks. And if you do you put into your risk, then you can retain the risks, you can develop your own data. And ultimately, you can go back to the insurance company in a few years time and say, Look, this risk you didn't want to price or you didn't want to insure us with because we didn't have because we didn't have you have no data, here's our data, right? You want to do it now. And then you can move ship, even shift that on from your, from your own balance sheet through your captives back to back to the traditional markets.
brandon 11:22
And sort of, I guess, on the flip side to that, what sort of businesses sort of typically, I guess I've traditionally sort of set up captives. And do you have any examples of these, you know, what industries have used captive vehicles traditionally speaking?
Unknown Speaker 11:37
Well, it's probably fair to say that a lot of established major companies already have captives. You know, I saw a stat a couple of years ago that I think it was like 90% of the Fortune 500 or something had captives all over the world. And, in Guernsey alone, I think 20% of the footsie 100 of captives that are that are based and managed out of Guernsey. So you can probably probably be fair to say that all types of industry use captives name guernseys home some of the biggest captive insurance companies in the world and a few examples you got BP, Rolls Royce, BHP, Billiton eights, ASA computers, Associated British foods, you know, you could go on and on with the names of companies who have captives here. And historically, most of them did very similar sort of business through their captives. So there was a lot of sort of property cover, like we've mentioned before, liability type covers. But these captives, we are starting to see as well then being interested in those other covers that will those new risks, and those are conversations that we're having with our clients and sort of captive owners all the time. It's a regular conversation we have with them or where we're running through the our risk management survey, looking at the results and saying, you know, which of these risks are key risks for you? And let's try and design something that you can put through your captive.
brandon 13:05
But do you think this has sort of changed maybe in the last sort of decade or so? You know, I know, you sort of touched on that slightly earlier there in the conversation about kind of tech industries and auto tech companies sort of, you know, coming to the fore in this space, in the sense that, you know, there's been a lot of conversation around cyber attacks, and including sort of state sponsored cyber attacks against against companies, particularly in the kind of Western world, quote, unquote, is this, you know, is this space opening up more like to say more than it was? Maybe, you know, 5-10 years ago?
Unknown Speaker 13:39
Yeah. So as you'd expect, I guess, given that many established organizations have captives and what we are seeing is captured growth from new and growing businesses. And what's great for eon and for Guernsey is I think we've established three brand new captives in the last 18 months from all different industries. But as you mentioned, a lot of the growing industries these days are tech companies are things along those lines. So we do see interest in the sort of up and coming companies in setting up setting up captives now, one that we we launched recently was for e-commerce business. So unsurprisingly, as he, as you can probably imagine that there has to be a high element of cyber covering its business plan, because it's, you know, that the underlying company is really around, sell selling things online to customers. So therefore, cyber is a very key risk for them. And it's not just pure captives we're seeing because usually, to set up a pure captive, you'd argue you need to be above a certain size because it's setting up a limited company and so right with costs and so on around it. We're also seeing people setting up protected cells. And these protected cells are often being set up by your sort of Do your SMEs, your new sort of smaller sort of growing companies and the Fast Track regime that was introduced in guarantee a couple of years ago by the GFSC has really helped us see growth in that area. This is sort of coupled with hard markets. Hard markets basically means that the premiums get higher, it's it's harder to buy insurance. So so a lot of these smaller companies that were seeing the insurance was getting a bigger percentage of the total costs. So they've looked at ways to reduce those costs. And one of those ways is to either retain the risks or keep some of the risk yourself, or maybe to access reinsurance markets, because reinsurance markets can be cheaper than insurance markets. So we've seen a lot of examples of companies looking to establish sales for that reason to reduce their cost of their cost of financing their risks. And examples that we're seeing a lot of are things like financial institutions looking to set up cells for for things like professional indemnity cover, where the price of that sort of insurance has skyrocketed in the market. I think it's leveling off now, but at least in the last couple of years, it has has grown a lot. And whilst on the subject of financial institutions, we're also starting to see more interest from banks funds, administrators come from managers sorry, in captives to see if they can hedge certain risks and free up capital on their own balance sheet. So I guess it's fair to say the world's changing and with it, the risks are changing and what is great is we seem to have a solution for most of these changing risks here in Guernsey through either captives or cells so it's definitely you know, exciting time to be involved in this space.
brandon 16:45
Definitely. Now, in the introduction, I sort of mentioned that you are of course Director of Global ILS, the Insurance Linked Securities arm of Aon. Can you talk about how Guernsey is well placed to sort of facilitate innovation and collaboration between the the kind of captive ILS and longevity markets and, and why this might be of interest to sort of, you know, unvalued to captive owners?
Unknown Speaker 17:09
Yeah, so, insurance linked securities while is a really an alternative to traditional insurance capacity, so by this I mean, insurance and reinsurance. Now, ILS really came about on the back of events like Hurricane Andrew, after which the insurance and reinsurance capacity dried up. So it wasn't that easy to buy insurance wasn't that easy to buy reinsurance at at a affordable price anymore. So you could argue that the hardened market conditions I've just mentioned before, is a reason why people are looking at sales and captives, you know, have created a similar condition or condition in the market with a lack of capacity. So, if you if you look at that in comparison to what happened back in the 1980s, with Hurricane Andrew, then, you know, there could be an opportunity for ILS to play a role again. Now, this is also coupled with the fact that ILS funds are seeking new risks to participate in following on from many years of hurricanes, earthquakes, wildfires, which means that there should be opportunities to sort of match some of these new risks off against the Insurance Linked Securities market. Now, it's always been a goal of mine and the rest of my colleagues in AON to bring these two sides of our business together. And really Guernsey is the perfect place to do this. So, Guernsey is a renowned domicile for the pension longevity transactions, I think all other than one that had been used using an offshore structure have been done through Guernsey. It's some major captive domicile, as we said, biggest in Europe. And it's got a history of innovation in the ILS space from the first cap on light, which was something called Solidum Eiger, to things like the more recent Lloyd's of London central funding deals and the reflexes volcano bond. So all the ingredients are there, in Guernsey, they're all there they're underpinned by a robust and pragmatic regulator, meaning that, you know, we're well positioned to fit together all of those pieces of the jigsaw, and bring all parts of that of that world together. Now, we've already seen examples of this with a transaction we did, probably about three years ago now with with a company an ILS manager called Securus, where where we established a cell for them, which was in fact factory insuring an existing longevity swap. So here we brought the longevity swap and the ILS world together. What so we can continue to do this with other sorts of sorts of risks or covers if needs be, or if we can join the dots, the value really to captive owners. If you can bring the ILS and captives together, then you can probably find and secure new capacity that can be more bespoke to captive owners. And it can be cost effective to our captive clients, and also potentially sort of be profitable to our ILS clients.
brandon 20:02
Yeah, definitely. I'd like to sort of discuss now sustainability, with your own sustainable finance is something that is sort of integral to virtually now, everything we do here at here at Guernsey finance promotionally speaking almost as well, and it's, of course central to the finance industry. Here in Guernsey. I think it's becoming ever more important in the insurance industry locally as well. Aon has recently released a report on using a captive insurance company to drive positive ESG outcomes. I've got a couple of questions on this, but But firstly, tell us what are some of the positive ESG outcomes that captive owners might look to address? Is this purely risk mitigation? Or are there some value opportunities in there as well.
Unknown Speaker 20:46
So firstly, I'd like to think that captives are in a pretty unique position, they can link the broader economy to the financial world. So they're like these sort of like financial entities owned by non financial organisations. So broadly speaking, captives are treated in a similar way to commercial insurance with governance requirements, disclosure requirements, but they're focused very much on one customer, their parents. So what this does is it allows you to get a bit more down into the detail of the risks. So what's happening at the parent level, as opposed to the broader market position that your traditional insurance company would see. So this means you can get an understanding of the risks, you can think about how you can offset or mitigate them, and you can promote sustainable practices. Well, when you know, the traditional market may simply decline to ensure something because it's considered they say, a dirty risk or something based upon the record of the whole sector. So therefore, captive is in a good position to act as a catalyst for change and transition within the company. Now think studies have shown that organisations that take ESG and sustainability seriously, on average, I think they achieve better results. So therefore, if if a captive can help sort of drive sustainable practices, it can be good, it can only be good for its parent, right? So there's a big value opportunity there to begin with. So if you can, if it captures can help you meet some of those ESG and sustainability goals, then automatically, it can, it can help deliver better returns for your, for your organisation. We we also take this all very seriously a on one of my colleagues, Ciarán Healy, he developed a concept that we call the green captive as a way for captive owners to help improve their ESG position. Now, in summary, your captive takes a position on risks linked to climate change. So for example, it could charge a high premium for risks linked to causing climate change issues, and it could use the profits that make from from those premiums into ESG aligned investments, or for improving risk management at a group level. Many captives, they loan their excess funds back to its parent. So that's the funds it's generated through the profits they've generated through insurance activity. So you can lend funds back to your parent with conditions attaching to it, you know, along the lines of we'll lend you this money back, but it should be used for transitional projects or for improving sort of risk manage ESG risk management practices. Another way you can do that through bursaries, where the captures profits are used to fund initiatives, improving ESG risk management and what these things can do is they can offset the underlying risks that we're ensuring. And then your captive becomes like an agent for continuous ESG improvement at the parent level, kind of like a virtuous circle, where we can keep on improving the ESG part of the of the parent business. And when I described captives at the start, I mentioned how you could identify risks trends, you could capture that data. Now, the consolidation of all this data in a captive can also help your parent identify risks, can help them quantify the ESG risks and report on them which all of course feeds into the reporting that they now have to do at a central level. And so I guess ESG considerations becoming more and more important in the world of insurance. And the data that captives can capture and can incubate within the captive can be very useful to their parent organisations.
brandon 24:35
And the report also examines some of the practical ways a captive can support sustainability objectives through through it's kind of four key pillars, if you like. Can you talk me through through these pillars?
Unknown Speaker 24:48
Yeah, so, underwriting is definitely the right pillar to start on, I guess as underwriting is the key role of a captive and it's also a core part of the UN principles of sustainable insurance, which says that ESG should play a role in insurance underwriting process. Now a way to achieve this is through the ESG metrics being used being linked to those of the captain's parents in a sample we've seen previously. And something we mentioned in the report we did. You can see it linked to the parents SDGs, such as carbon water usage, plastic production, for example. And this can help reporting and feeding into their goals. I mentioned pricing in the last question. And so if you incorporate ESG related metrics, into your assessments and measurements of risks, then you could consider that along with traditional market pricing methods to come up with the right price from a premium perspective. So you can underwrite so you can underwrite sort of accurately with with accurate data, so on and so forth. As well, I guess, it's not just for pricing, it can be used to help assess the scale of the risks, it can be used to create awareness of the risks within the parent and therefore the downside of not meeting those risks from a parent perspective and them not meeting their SDGs. If you incorporate ESG into the captives underwriting approach, it can also lead to well, you'll have to look at it when you're doing all the boards or have to look at it when it's looking at its solvency calculation. So in Guernsey boards of captives have to provide own solvency capital assessments. So ESG risks should really be considered there and therefore considered in the capital adequacy, decision making particularly downside risk of failing to meet targets. So you can almost use your your captive as a way to sort of pre fund future risks by retaining funds within your vehicle that can be be used when needed. Now, all in all, these metrics can help its parent organisation, through its captive identify areas of of its business that may disrupt the you know, the transition and risks and not meeting its its SDGs. Now, I think the next one was was investment. So I mentioned earlier, investing in ESG. Aligned investment products. Now traditionally, captives have invested in cash, short dated deposits, government bills, T bills, that sort of thing. Moving to ESG, aligned investment products may appear on the face of it to add more complexity to this part of the capital's business. But what we're seeing increasingly is financial institutions and asset managers offering new products with sustainability credentials that can still meet a captain's liquidity requirements. As with all captives, however, the aim of the game should be to match your liabilities, your assets, and you can argue the some of the ESG or liabilities could be longer term. So the risks, the ESG, risks that you're putting into your captive, may have a long horizon before they have to pay out any any claims if especially if they're linked to climate change. So when you start looking at the sort of longer term investment opportunities in the ESG space than they are, they're a lot higher, for example, you've got green bonds, you've got green funds, you've got the Guernsey Green Fund, for example. So this longer term view doesn't necessarily come with a higher capital charge on solvency. Recently against the Financial Services Commission, they introduced a green capital or green discount on capital for long term life insurance. So which are investing in in green assets. So that really encourages people with long term risks, to actually give some an incentive to invest into green assets. So who's to say really that we can apply similar to captives going forward, and captives parents increasingly banks, shareholders, corporate debt providers, that they're focusing on climate change and ESG issues and therefore, if your captive is investing in ESG compliant products through subsidiary, it can help you as a parent organisation with with your sources of capital keeping your shareholders happy, and raising potentially new capital from from banks and other organisation. It can also as the captive can also help in in risk management and improvements. I think I mentioned this briefly. On the green captive, the data collected in the captive through underwriting can help identify where ESG risks exist. So if you use the funds generated by the captive to reduce this risk, you can create this continuous improvement model or virtual virtuous circle, as we said before, I think I mentioned bursaries as board before as well. If we gave another example we given our report is around biodiv. Diversity. So if a company is completing a construction project, it can offer a bursary to a financial, towards financial sort of transitional projects around the site. So it could say, you know, you know, by insuring with us, we will pay you a bursary to fund certain things either to either to fund the replanting on front other things around the sites to to improve the biodiversity or it can also be used to do fun things like biodiversity risk assessment. So there's, there's lots of things that we can do with with bursaries to then give back to the parents to sort of fund things that will improve the ESG aspect of things that the parent is doing. Now, I think the next one, so we, one of the other pillars was societal resilience and transition support. Now, this is really all about the protection gap, the protection gap continues to widen sort of all over the world. So that's really about not having insurance protection against natural disasters. If you look about if you look around about where most of these disasters happen, arguably, it's, it's the areas where there isn't insurance protection, where they where they suffer the most. So at Aon, what we do, we've got a team that's focused on bridging this protection gap, which I'm pleased to be be part of, it brings together parts of our entire business. And what we're looking here at is solutions to help. And one of the parts of that, that we're looking at is how captives could could help bridge that protection gap. So what we are seeing is insurance is increasingly being looked at by NGOs, as non government organisations to support in, in the event of a disaster. And we'll go on to discuss this a little bit later with on the humanitarian piece, I think, but perhaps captives can be used in a similar way to provide insurance to underserved sort of parts of society. And in doing so, they can also like supply that supply chain, for example, if you've got a confectionery company, it can provide weather insurance or weather related cover to, to its cut through its captive story to help farmers recover from extreme weather events, then they can be back producing their cocoa beans quickly, which helps, you know, helps protect the supply chain also helps the farmers to recover which is good for the local community. So the captive can be used to, to do something like that. It could also be used to access reinsurance capital or, or parametric type covers, which can be linked to weather events to cover this. So if you were to link the objects, and quite often, they're sort of captive parents, they have charitable foundations, they have these sorts of things that do support humanitarian efforts, or ESG, or ESG things. So if you can line your captive up along with the objectives of your parent, its charitable foundations, then potentially you could help the captive can help increase the parents impact on these courses, and it supports.
brandon 33:04
Certainly, very interesting sort of changing track now, and I'm taking a bit of a step back, I suppose. You know, Guernsey is a jurisdiction has worked sort of very closely with the United Nations Environment Program and its finance initiatives over the last sort of probably 5,6,7 years now and guernseys insurance industry has been no different. And and he's worked closely with of course, the PSI, the Principles for Sustainable Insurance, and how useful Do you think principles like these are from the UN in building in kind of a sustainability consideration for the insurance industry?
Unknown Speaker 33:42
Yeah, so I think PSI is are important and guernseys insurance industry it recognised this a while ago, so gear became a signatory of the UN PSI, I think he was back in 2020 as a way to help captive and insurance clients to measure and articulate their sort of their contribution towards towards ESG. Now, I think as a group at Aon, we were probably one step ahead of this, we were the first business in the insurance broking community to adopt the principles ourselves back in back in 2018. So if we if we move forward a little bit following on from this sort of Guernsey introduced the frame, the ESG framework or kite mark back in 2021. The first and probably a key pillar to this kite mark is around governance and that ESG is embedded in decision making. So I guess if you're appointing against the based insurance manager such as Eon is a member of gear, you can then be confident that you're you know, your manager is part of or a member of a body that is signed up to the psi s as gear is signed up to those PSI. So that should give should give a certain amount of conflicts organisations, you know, setting up a captain in Guernsey and looking and looking for a manager and it's not just the Un PSI is that will key to, to this framework, it was also their sustainable development goals. So the SDGs, which which formed part of the Guernsey framework that was put in place, so, so the UN's various principles and goals and stuff played a big role in that in that framework that we put in place. Now, the US, UN sorry, not us, the UN PSI were launched, I think they were launched over 20 years ago now, as a way to sort of strengthen the world's insurance industry's contribution towards ESG. And I saw a stat, I think it was in October 2022, that over 220 organisations are signed up to this, this insurance organisations and they've contributed sort of, I think it was over a third of the world's insurance premiums have gone through companies that were signed up to the psi. So it's being taken seriously by major insurers as well. So with ESG, and other similar factors being so important, I think it's important for the insurance industry, including captives to embrace this, because it's very much the direction of travel. So by recognising this early, as both Aon and Guernsey did, it does really put the island in a great position to the front of the queue to grow in this space. But we had eon and part of the reason why we did the report on the psi is is we worked with the UN and the clients, although unfortunately not against the client to sign up to the UN psi as last year. So this was the first captive to do that in the world. And we hope that many more follow the principles. You know, they provide a great framework and a great opportunity for us to put this into place for for other captives and it helps her parents to publicly demonstrate that their subsidiaries have adopted the PSI. So take sustainable insurance, accountability, transparency, etc. Sort of like seriously so, from a from a Guernsey perspective, the PSI is is great. It shows the island is committed to developing green and sustainable finance. It provides us with a framework to allow the industry and currency to play its part in building that resilient and sustainable future. I take great pride in our involvement as an island so and doing so many firsts when I meet people I often mentioned, Guernsey was, you know, the birthplace of the first PCC that's that's white rock in 1997. The first humanitarian cat bond on it re volcano bonds the first ESG Kitemark again issued to done it read the volcano bond. So I'd like to think that, you know, the captive signing up to the PSI is, is the next step in the evolution after the ESG framework, which is great. Now, you know, when I'm talking about people signing up to the PSI, with their captives, I can say, but of course, still the framework in Guernsey was the first one. So it's still there. It's still a good message for Guernsey to be giving that we were we were there first. And look what's happened, what has happened since.
brandon 37:57
Certainly, and finally, just a final question that I have to ask you this, because you have also worked very closely with several humanitarian charities insurance for the disaster relief funds can quickly get to the places that need it most, when disaster strikes. But can you just tell me a little bit more about this?
mike 38:14
Yeah, so this all really started for us with the Danish Red Cross volcano bond that we did through Dunant Re, which was launched a few years ago, that was worth the world's first humanitarian cat bond at the time. So with humanitarian organisations, what they can deploy in the event of a disaster is really this historically been limited to the assets they raise. So you know, the people in town, giving you the stickers for your pound, that you put in the tin, that sort of thing, they collect that money. And that's what they have to spend in the event of a disaster. They can't leverage their balance sheet like other financial, like financial institutions where they can't take out a loan, they're reliant on donor funding. So what a transaction like these humanitarian type transactions do is it, it allows them to, for a premium to access a wider pool of sorts of funds that can be distributed in the event of a disaster. So if we take the Red Cross transaction, for example, the Red Cross paid links as a premium of $150,000. And for its $150,000, it has access to 3 million of funding in the event of other disaster, and that funding comes through capital market investors. So it does almost it does allow them to sort of leverage their, you know, their, their balance sheet to a certain extent and to get more protection than they have, or to have more funds to deploy than money that they have in the bank. The other important part of these transactions, or this transaction was it was parametric. So parametric basically means you don't need to prove a loss, right? If an event happens, the monies paid out. And that's great because it means the funds get released a lot quicker in the case of the volcano bonds If a vote if one of the name number of named volcanoes erupts, then the payout is calculated based upon the height of the ash cloud and the wind direction. So if the ash cloud is over a certain height and the wind direction is going in a certain direction, then if it blows over certain lands where people live with its agricultural land, or whatever it may be, then of course, that's going to increase the payout. But that payout happens immediately. A lot of traditional insurance requires you to bring in your Loss Adjuster to assess the loss and so on before the insurance paid so, so the money gets paid back to the Red Cross pretty pretty quickly. And that means they can deploy their assets to a disaster zone very, very quickly as well, and start putting work the money to work where it's where it's needed the most. So, as I said, it's, it was a relatively small deal in the scheme of things. But the impact was huge. It's still something whenever I go to a conferences, the first thing people ask me about, you know, tell me about the volcano bonds. So it definitely gathered a lot of attention. And we are working on further projects around things like protection of the Philippine mangrove forests with the Red Cross. So that's something we hope to finish at some point this year. So, so watch this space. And I would say it's not just the Red Cross. There's more humanitarian organisations who are interested. Along with my eon, bridging the protection gap team, we'd be speaking to organisations all over the world, people like the World Bank, the United Nations, other parts of the Red Cross, other charitable organizations and NGOs, talking about replicating what we're doing here. Well, we've done here but bigger and again, hopefully we can have some more news on that for you guys soon.
brandon 41:45
Brilliant. Well, thank you very much, Mike, for joining us on the podcast today. Thank you. It was fascinating to understand some of the innovative ways that captives can be used particularly with regards to climate and the environment as well. And thanks also to you for listening. If you enjoyed this discussion, we have a backlog of interviews on the We Are Guernsey podcast channel, you can check them out by searching for we are Guernsey on your preferred podcast platform. We will have links to Mike and Aon in our show notes. So check them out to hear more from them. And to find out more about Guernsey and its specialist financial services industry. Head over to our website - weareguernsey.com We look forward to welcoming you back to the podcast but until then it's goodbye from Guernsey.
Transcribed by https://otter.ai