Chinese corporates are getting increasingly comfortable with the captive concept, but it will be a long road. Guernsey is one of the leading jurisdictions looking to develop rising interest in the sector.
In December 2013 Prime Minister David Cameron led a UK delegation to China with the aim of boosting trade between the two countries. His visit came just a couple of months after a similar visit by Chancellor George Osborne and Mayor of London Boris Johnson and a few weeks after the Chinese government's Third Plenum during which a portfolio of proposals were unveiled which will help to further liberalise the Chinese economy.
This liberalisation will present increased opportunities for Western firms to do business in China. This is something which is clearly recognised by the UK government and why they have been so busy in China in recent months.
Between the visits by the Prime Minister and the Chancellor, a delegation from the British Crown Dependency of Guernsey also visited Beijing and Shanghai. It was led by the Island's Chief Minister Peter Harwood, and included Kevin Stewart, Guernsey's commerce and employment minister, William Mason, director general of the Guernsey Financial Services Commission (GFSC) and Fiona Le Poidevin, chief executive of Guernsey Finance— the promotional agency for the Island's finance industry.
With financial services directly contributing 40 percent of Guernsey's GDP, it is perhaps no surprise that this provided the focal point for the As well as visiting sector associations and professional services intermediaries, the itinerary included meetings with Tu Guangshao, the vice mayor of Shanghai and the banking, securities and insurance regulatory authorities in Beijing. The GFSC signed a Memorandum of Understanding with the China Securities Regulatory Commission during the visit and reaffirmed its commitment to a similar agreement that was signed with the China Banking Regulatory Commission in 2011. In addition, a visit was also made to the China Insurance Regulatory Commission which built on the previous meetings that have been held since Guernsey opened its representative office in Shanghai in 2007.
"Previously, discussions have centred on the captive concept and Guernsey's credentials in this area," said Le Poidevin.
She pointed to the facts that the first captive in Guernsey was incorporated in 1922; the Island pioneered the protected cell company in 1997; there were 778 international insurance entities currently licensed in Guernsey at the end of September 2013; and that in the first half of the year Guernsey's first insurance-licensed incorporated cell company with an Asian-headquartered parent was formed.
"However, the captive concept remains relatively unfamiliar to the Chinese economy. The first captive was established in Hong Kong in 2000 (and a second has just been licensed), but it is only now that the first Chinese onshore captive has been formed. A significant reason is that Chinese insurance law doesn't differentiate between types of insurers and therefore the capital requirements are particularly onerous for captives," she said.
"Having said that, on this occasion, our visit came just after the Chinese government's Third Plenum which unveiled a series of measures to liberalise the economy, including a pilot Shanghai free trade zone. It is being suggested that under the Shanghai free trade zone more flexible regulation may be introduced, including potentially lower capital requirements for companies in the zone. We are investigating whether this could apply to captives and commercial insurers and reinsurers.
"We were able to explain the way in which Guernsey offers proportional regulation in line with the insurance core principles of the International Association of Insurance Supervisors (IAI S) and that we have been developing our own solvency regime to meet the needs of our specific market. There is significant potential for us to work with the Chinese authorities to help them develop a sustainable regime for captives if they so desire."
China is home to some of the largest companies globally, including a number of major state-owned enterprises. Le Poidevin added: "We would expect them to insure their local risks in a domestic captive but our belief is that once they are more comfortable with the concept and have developed foreign interests, then it would make sense for them to establish a vehicle in Guernsey to cover their global risk base.
"This would be in a similar vein to the way in which large American multinationals often have a captive on that side of the Atlantic for their US risks and another in Europe for their non-US risks."
"Guernsey's insurance industry has a truly international client base but the captive concept is much less well understood in China and it
is a case of raising awareness over time and ensuring that we are well placed so that when the market matures we are a trusted business partner ready to develop and respond to any opportunities that arise," said Paul Sykes, managing director of Aon in Guernsey and also chairman of the local professional body, the Guernsey International Insurance Association (GIIA).
It will take some time before more Chinese corporates are establishing captives in traditional Western captive domiciles. However, while it may be a long road ahead, with the Chinese economy opening up and jurisdictions such as Guernsey raising their profile in the region, there can be optimism that it will be a path increasingly taken in the future.
An original version of this article was published by EMEA Captive, March 2014.
For more information about Guernsey's finance industry please visit www.guernseyfinance.com.
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