Originally published in Strategic Risk, Captive Management, A guide to European captive domiciles and company strategies, March 2009
Updating solvency frameworks has become essential for captive domiciles in the light of Solvency II. Richard Walker, Director of Policy and International Affairs at the Guernsey Financial Services Commission (GFSC), describes Guernsey's approach.
Failures and near-failures in the global insurance market during 2008 have raised questions about international regulatory standards and in Europe have placed greater focus on the proposed Solvency II regime. As a result, Guernsey has updated its solvency framework.
Last year the Guernsey Financial Services Commission (GFSC) augmented the existing risk based approach to supervision with the introduction of the 'own solvency capital assessment' (OSCA). This requires licensed insurers to justify their view of an appropriate solvency margin requirement, subject to an absolute minimum level calculated in accordance with the law. We believe that this provides a vigorous regulatory regime which affords the right environment for the continuing successful development of the island's international insurance industry in 2009 and beyond.
Mature yet modern
It is now 23 years since Guernsey's original insurance legislation was introduced. The island was one of the first jurisdictions to introduce a regulatory regime for captives.
Just over 10 years later came one of Guernsey's great success stories when it pioneered the protected cell company (PCC) concept. Further legislation was introduced in 2006 to provide for incorporated cell companies (ICCs). There are now more than 70 PCCs and ICCs and more than 350 insurance cells in Guernsey, including the first insurance-writing incorporated cells.
The primary regulatory law, the Insurance Business (Bailiwick of Guernsey Law), 2002, is supplemented by codes and regulations. Some of these were amended with effect from March 2008. The amendments followed a period of extensive consultation with the insurance sector.
The GFSC has put in place a regulatory framework that operates to international standards and follows the insurance core principles (ICPs) developed by the International Association of Insurance Supervisors (IAIS). It has a statutory duty to protect Guernsey's reputation as a financial centre and this is reflected in the approach to supervision.
The GFSC plays a very active role in the work of the IAIS and is represented on the executive committee as well as the technical and implementation committees. The GFSC's director of insurance chaired the IAIS captive guidance paper drafting group, which was formed in 2007 to prepare a guidance paper on the supervision of captives. This paper was adopted at the IAIS annual general meeting in October 2008.
Guernsey has been selected as a member of a task force which is reviewing the ICPs and is chair of the market conduct subcommittee. The commission is also involved in the following IAIS subcommittees: insurance laws; regional coordination; reinsurance; solvency and actuarial issues; accounting; insurance groups, and governance and compliance.
The GFSC has used a risk based approach to supervision for many years. A risk rating is currently assigned to each company, based on a set of standard criteria. This approach enables us to focus our resources on the areas of greatest risk and to identify where enhanced supervision may be required.
The EU's Solvency II Framework Directive proposal establishes the proportionality principle as a general principle that applies throughout the directive. Having implemented a risk based solvency requirement that is proportionate to the Guernsey insurance sector, the GFSC will explore the possibility of agreeing a mutual recognition treaty between Guernsey and the EU. Such a treaty would help Guernsey captive insurers use EU insurers to front their business, as it would enable the EU insurers to take account of reinsurance placed with the captive for solvency purposes.
2009 and beyond
The introduction of the OSCA is very much seen as part of the Guernsey package that will enable the island to maintain its lead in the regulation of captive insurance while allowing captives and other types of business, such as reinsurance, to develop. As regulators our role includes keeping pace with these developments and maintaining Guernsey's reputation as an insurance centre.
For more information about Guernsey's finance industry please visit www.guernseyfinance.com.
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