Originally published in Commercial Risk Europe, March 2011
Captive mangers around Europe are busy trying to work out how to cope with Europe's planned new solvency rules that do not look particularly captive friendly as they stand. Guernsey thinks it's better off outside on the sidelines. Adrian Ladbury, Editor, Commercial Risk Europe reports.
Guernsey believes that its decision not to seek equivalence with Solvency II could help spark a migration of captives from 'onshore' EU domiciles such as Dublin and Luxembourg. This is because costs should still be lower for captive owners on the island despite the likely rise in fronting costs for those that write EU business.
The island's captive community is convinced that the higher costs that Solvency II will bring for captives are wholly unnecessary. There is no point in imposing such costs on Guernsey captives that under current rules are already prohibited from writing business directly into the European Union without using a fronting insurer, they say.
Guernsey finance leaders are convinced that the island's decision to opt out of Solvency II and rely instead on its Own Solvency Capital Assessment (OSCA) regime and standards, based on those issued by the International Association of Insurance Supervisors (IAIS) with which it is a signatory to the Multilateral Memorandum of Understanding (MMoU), will do it no harm with captive owners. Indeed, they report that captive managers on the island have already received queries from captive owners in EU domiciles that are interested in setting up reinsurance vehicles in Guernsey.
"Solvency II has been designed to address issues mainly relating to systemic and group risks within commercial insurance markets. These are risks not generally faced by Guernsey-based international insurance companies, where there are a large proportion of captives. Under the current proposals, Solvency II is set to impose a blanket set of capital requirements and therefore equivalence would burden Guernsey insurers with unnecessary additional costs and render currently effective captive business plans uneconomic. As such, there would be no significant new sources of business attracted to the island by equivalence and indeed, the opposite may prove to be the case," Peter Niven, Chief Executive of Guernsey Finance, the promotional agency for the island's finance industry, told Commercial Risk Europe.
Leading Light
Guernsey has made its name as the leading captive insurance domicile in Europe by being independent and as such, being able to offer something different to the commercial insurance markets. Not seeking equivalence ensures that this will continue. Guernsey was one of the first jurisdictions to introduce a risk-based approach to regulation and in recent years this has developed with the introduction of the Own Solvency Capital Assessment (OSCA) regime. We will continue to meet the standards of the International Association of Insurance Supervisors (IAIS) but the principles of proportionality mean we will provide a more attractive environment for captive owners and other niche insurers," continued Mr Niven.
Mr Niven pointed out that Guernsey is not a member of the EU and so captive insurance companies domiciled there cannot currently write business directly into the EU. The decision not to seek equivalence means that position is not effectively changed and any Guernsey captive that wants to write European business will have to continue to use a fronting insurance company that meets the Solvency II requirements.
The fronting insurers will incur extra costs because of Solvency II and some of this will be passed on to customers. But Mr Niven said that the Guernsey market does not think that this will be a big problem, particularly when stacked up against the benefits of being able to offer a more proportional regime than that which the EC appears to be currently planning to introduce under Solvency II.
"This may mean that the costs are passed on but we do not see this as wholly different to what happens currently and therefore it will not be a major problem. In fact, we believe that offering a regime which is more proportional to the business models of captive owners and other niche insurers may prove attractive for captive owners and their insurance vehicles currently based within EU domiciles, such as Dublin and Luxembourg – our two major competitors in Europe, and especially where they are writing business outside the EU. I have also heard that some service providers are already receiving a number of inquiries from firms looking to establish reinsurance vehicles on the island," said Mr Niven.
Bermuda and Switzerland were keen to jump on the Solvency II bandwagon and have been accepted as candidates for the first wave by the EC. But Mr Niven said that this has been done primarily to protect their international commercial reinsurance industries and not their captives.
"In each case they may be looking to mitigate the effect of additional regulatory burden involved through the exclusion of captives specifically or the application of so-called proportionality principles that the European Captive Insurance and Reinsurance Owners Association (ECIROA) and others are looking to have included within Solvency II. The progress of all of this debate will be followed with great interest," he said.
The number of insurance licenses issued in Guernsey last year rose marginally from 2009, which was up 25% on 2008. The Guernsey Financial Services Commission (GFSC) reported that there were 47 insurance licenses issued during 2010, compared to 46 in 2009 and 37 in 2008.
Twelve new international insurers were set up on the island last year. These comprised of 4 new 'pure' captives, 4 new Protected Cell Companies (PCCs), 2 new Incorporated Cell Companies (ICCs) and 2 new ICC cells. There were also 35 new PCC cells made up of 23 conventional PCC cells and 12 life policy cells, stated the GFSC.
The new additions mean that Guernsey is now host to a total of 675 international insurance entities. This includes 341 international insurers made up of 265 pure captives, 63 PCCs, 5 ICCs and 8 ICC cells. There are also 334 PCC cells, split between 252 conventional PCC cells and 82 cells writing life insurance.
One notable recent addition to the island's captive community was brought by JLT Insurance Management (Guernsey) Limited, which has been appointed insurance manager for the City of London Corporation's newly formed reinsurance company, City Re Limited. This adds to the number of UK government-owned insurance entities such as Network Rail, Transport for London and the Royal Mail that are based on the island.
Strong Growth
The island's insurance sector has seen the value of business increase strongly over the last decade. In 2003 the industry had gross assets of £10.8bn, a net worth of £4.4bn and premiums of £2.1bn. In 2009, these had risen to gross assets of £23.4bn, a net worth of £8.1bn and premium written of £3.4bn.
Nr Niven remains in bullish mood despite the obvious challenges posted by the new regulations and the stubbornly soft commercial insurance market, which traditionally deters risk managers form setting up new captives as they can find the cover so cheaply on the open market.
"It is very positive that we are attracting this new insurance business to the island and thereby retaining our position as the leading captive insurance domicile in Europe and number four in the world. What we are seeing is that business introducers are continuing to recognise Guernsey as a captive domicile offering real quality in terms of service providers and professional advisers as well as robust yet pragmatic regulation and international standards of corporate governance. The figures also demonstrate Guernsey's strong reputation for its innovation of the cell company concept and expertise in using them creatively to provide risk management solutions," he said.
For more information about Guernsey's finance industry please visit www.guernseyfinance.com.
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