Fiona Le Poidevin, Chief Executive of Guernsey Finance, explores how captive insurance offers a new revenue stream for brokers.

I am sure that brokers, like the rest of us, are eager to tap into any possible additional flows of income. Those that are, will be very interested to learn more about a potential new revenue stream for their business offered by captive insurance.

The captive concept

A captive is an insurance company which is usually formed for a specific purpose, primarily self-insurance. Captives can be established through conventional limited companies, Protected Cell Companies (PCCs) or Incorporated Cell Companies (ICCs).

A cell company, which is made up of a core and individual cells, provides the advantage of a parent being able to write different lines of business into individual cells or third parties being able to own a captive and allocate individual cells to different clients.

For brokers, this opens up a range of possibilities, particularly for the small and medium sized enterprises they typically represent.

Captives for brokers

By establishing their own reinsurance captives, brokers can cover their client risks through conventional insurers and then at least some proportion of these are reinsured through the captive, with the risks of different clients written into separate cells.

These third party captives offer some of the following advantages for brokers:

  • Earning of additional revenue
  • Enhances control
  • Ability to identify good quality business – low claims ratio
  • Hedge against a hardening market
  • Pricing and cover flexibility
  • Access to reinsurance markets
  • Tailored service for clients creates more value from existing profitable business

In addition, compared to seeking coverage solely through the conventional insurance market, use of a broker reinsurance captive not only retains the premium within the structure but also generates an underwriting profit which only has to be shared with the client.

Another option is to offer clients the ability to tap into captive insurance through the use of a 'pure captive' which sits as part of the client's group structure and complements other coverage through conventional insurance.

This could be via a wholly owned subsidiary or a cell of a PCC or ICC but either way, the key thing to remember is that the broker still has a part to play in formulating the right programme for the client and is likely to be retained in some capacity going forward.

The Guernsey difference

Brokers looking to find out more about the options open to them and their clients should look no further than Guernsey. The Island is home to more than 770 licensed international insurance entities, which means it is the largest captive insurance domicile in Europe and number four globally.

The strength of Guernsey as a captive insurance domicile is underlined by research showing that approximately 40% of the leading 100 companies on the London Stock Exchange with captives have them domiciled in Guernsey.

Indeed, a significant majority of the international insurers licensed in Guernsey have their parent company located in the UK, however the Island's insurance sector is truly international. Firms from across Europe, the US, South Africa, Australia, Asia, the Middle East and the Caribbean have all established captives in the Island.

A major draw is the fact that Guernsey pioneered the cell company concept back in 1997 when it introduced the PCC. This means that the Island has unrivalled experience and expertise in cell company structuring.

For example, Aon's White Rock Insurance Company PCC Limited was established in Guernsey as the first PCC in the world and has since been used by more than 50 corporations as a cell captive facility; and Guernsey-based Heritage Insurance Management also achieved a worldwide first in 2010 by amalgamating two PCCs – with 17 cells between them – into one.

This is in a jurisdiction where the financial services regulator, the Guernsey Financial Services Commission (GFSC), is not seeking equivalence with Solvency II but does adhere to the insurance core principles of the International Association of Insurance Supervisors (IAIS), providing proportionate regulation to the specialist captive insurance market.

A new revenue stream

Guernsey offers an ideal environment for establishing a captive and brokers should be looking to tap into the knowledge within the market at the earliest opportunity. Doing nothing is simply not an option as it is likely that clients will hear about the advantages of captive insurance from another source. Brokers should take the initiative to be informed as this is not only the best way to retain clients but they may also generate themselves a new revenue stream.

An original version of this article was published by Insurance Age, November 2013.

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The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.