Risk is a downside of any investment. Higher risk can make a project economically viable – the higher the risk, the higher the return required to compensate for it, and thus the less likely it is to be able to deliver it. And a number of investments rely on minimising risk altogether: such as pensions, insurance, and reinsurance. Where they do, IFCs are uniquely placed to minimise that risk.
Because IFCs are tax-neutral, they are used as an intermediate venue to pool capital from multiple onshore economies. From there, it’s invested in IFCs back into multiple onshore destination jurisdictions. This diversifies the portfolio: reducing risk. Mitigating this risk reduces costs, increases risk-adjusted returns, and thus makes more projects economically viable.
Bermuda hosts 40% of the world’s insurance-linked securities and is home to 25% of the world’s captive insurance market. 70% of the world’s hedge funds are domiciled in the Cayman Islands. During the financial crisis, Jersey, Guernsey, and the Isle of Man provided £350bn of net financing to the UK: dramatically improving liquidity and allowing financial institutions and businesses to survive the unprecedented shock.
This is essential to a range of everyday financial operations: