Originally published in the Captive Review, Guernsey Special Report, January 2012
Martin Le Pelley looks back at his first year as chairman of the Guernsey International Insurance Association (GIIA).
The Guernsey insurance market is well placed, thanks to its reputation for quality and robust regulation, to endure the economic and political storm that is engulfing the rest of Europe.
In fact, the uncertainty created by the credit crunch and subsequent recession, emphasises how important proper risk management is within companies operating in the European market. However no one in the local industry is complacent and, in my first year as chairman of the Guernsey International Insurance Association (GIIA), the association has seen an unprecedented list of threats and opportunities, partially caused by the changing political and economic landscape.
In this article, I will discuss some of these challenges, and how the association has addressed them, as examples of how the insurance industry in Guernsey works together to ensure that we all collectively take responsibility for the enduring appeal of the captive industry and the wider insurance market on the island.
Rising to challenges
One of the first challenges that I faced as incoming chairman was the issue of changes to the accounting rules for insurers caused by the proposals for Phase II of International Financial Reporting Standard 4 (IFRS4) on the accounting for insurance transactions, coupled with the proposals for small and medium-sized companies which did not include provision for small and medium-sized insurers.
Captive insurers are not like normal commercial companies, and therefore a requirement for captives to comply with international reporting standards for commercial companies would have been inefficient and unnecessary.
GIIA put together a response to the Accounting Standard Board (ASB) consultation on the financial reporting for small and medium-sized companies to emphasise the need to allow some carve-out for captives. This has been met with a favourable, sympathetic response from the ASB who were overwhelmed with over 200 responses.
Why is this important for Guernsey's insurance market? Well it is important that we can continue to provide cost-efficient and pragmatic accounting solutions for the large number of small insurers under management in Guernsey, so any change to accounting standards which increases the level of reporting unnecessarily (because there are only a very limited number of readers of captive accounts) would impact the efficiency of our market, which is unattractive at the best of times, but more so in a recession.
The next big challenge which came our way was the consultation from HM Treasury on the changes to the Controlled Foreign Company (CFC) legislation. Captives are, in the main, controlled foreign companies, many of whom have UK parent companies. Some 40% of FTSE 100 companies with captives have them domiciled in Guernsey. The current UK coalition government is quite focused on restoring the UK commercial competitiveness, so it was important that any changes to the CFC rules did not have a detrimental impact on the ability of UK companies to continue to use Guernsey captives.
The proposals are still being finalised, but in December the Treasury announced the draft legislation that will form part of the Finance Bill 2012, which appears to offer some opportunities for smaller captives. The government has tried to make the rules simpler, and has introduced a low-profits exemption for CFCs of £500,000, which means that smaller captives with accounting profits below this level will not have to account for UK tax in their parent's tax computation. Larger captives only suffer tax on the profits of underwriting UK-based risks, so international captives of UK parents will fare better under the new rules.
Furthermore, non-captive insurers may be able to avoid the CFC rules altogether, as long as they can prove that the mind and management and "significant people functions" relating to the company are located offshore – in other words, the company was not set up purely to avoid UK tax. I would like to think that the GIIA's response to the consultation did go some way to help the Treasury to reach what appears to be a sensible result for captives. There are still some uncertainties, such as the way in which PCC cells will be treated, however the low-profits exemption will hopefully do more good than harm in encouraging companies to set up Guernsey captives during 2012.
Of course, Solvency II and equivalence remain 'hot topics' for captive insurance domiciles. Guernsey was the first domicile to publically state that it would not be pursuing equivalence with the Solvency II regime for the time being. This decision has been largely welcomed by all parts of our industry, as it bring about certainty and clarity over the way in which insurance will be regulated in Guernsey, and helps to reassure captive owners who have significant concerns about the application of Solvency II to captives.
There is still much uncertainty over the way that Solvency II will be applied to captives, and also to the way in which equivalence will affect captives in domiciles such as Bermuda and Switzerland. However in challenging economic conditions, most companies will not be welcoming of any regulations that require additional capital to be put into their captives unnecessarily, something the Guernsey insurance market and regulator is very aware of.
During the year, GIIA has remained active within the local community, being an active member of the Guernsey International Business Association (GIBA) and keeping a close eye on developments at the regulator, government and tax office in particular. While the regulations and tax position for captives are very unlikely to change during 2012, there is a local election such that some changes in the government are inevitable.
GIIA has a good relationship with all parts of government and will continue to ensure that any proposed changes to legislation affecting the finance industry, and the insurance industry in particular are properly considered, consulted on and responded to. During the year, the GIIA has responded to a number of consultations on a variety of topics ranging from a financial ombudsman to the make-up of Guernsey's population.
Finally, 2012 has turned out to be a positive year for business growth in Guernsey. At the end of 2011, Guernsey had licensed more insurers than in the previous year, with 72 in total. While there have also been a number of licences surrendered, the overall activity in the market, and the trend for continued growth in both number of entities and transaction volumes (total premiums written are now more than £4bn per annum) is excellent news, and I believe supports the positive contribution the GIIA has made to preserving and enhancing the insurance industry in Guernsey, and maintaining its position as a cost-efficient and attractive domicile.
We are only a few days into 2012, but I am hopeful that this year will also be a positive year for insurance in Guernsey, and that GIIA will continue to represent the industry and remind market participants and new entrants alike why Guernsey is the most popular captive insurance domicile in Europe and one of the largest in the world.
For more information about Guernsey's finance industry please visit www.guernseyfinance.com.
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