Originally published in Strategic Risk, Captive Management, A guide to European captive domiciles and company strategies, March 2009
For captive domiciles with a strong insurance sector attracting reinsurers and other associated businesses is a natural progression. Nick Wild, Executive Chairman (ex Americas) of JLT Insurance Management, explains how Guernsey has approached this challenge.
There are new sources of capital coming to the reinsurance market. This capital is being deployed very quickly, often to write specific risks for relatively short duration. And we believe that this type of operation lends itself admirably to the Guernsey business model.
Guernsey is experiencing an increasing level of interest from the investor community keen to access insurance risk. It offers diversification into an uncorrelated risk landscape where the returns can be significant although the risk of losses should also be considered.
Against this background Guernsey is seeking to garner interest from those organisations operating in this area that will enable us to further diversify the island's insurance sector. A key question is, of course, what sort of reinsurance would be good business to conduct from Guernsey? We have identified the following:
- non US business – Bermuda and Cayman are better placed to work with the US markets and this is not a focus for Guernsey
- business with generally low administrative work loads. There are not large numbers of staff available to apply to a low level administration business: although much of this work could be outsourced from the island where processing is a requirement of the business plan
- business that can take advantage of the:
- zero tax regime on the island
- the island's approach to regulatory requirements for capital regarding solvency margin requirements (SMR) and own capital risk assessments
- legislation that enables a single entity to enter into insurance/reinsurance contracts and capital market derivative contracts, such as insurance linked securities (ILS) and International Swaps and Derivatives Association (ISDA) contracts from the same company
- securitisation of insurance portfolios, particularly life.
- business that may complement the captive insurance business that exists in the island, as these captives are collectively very substantial purchasers of reinsurance capacity.
There are a number of key players that have already established operations. These include Barbican Re, Catlin, Conopious, Generali and Hiscox.
The potential for this area to be significantly expanded has been opened up by the announcement that a licence has been issued to Lloyd's which permits its underwriters to write direct general insurance business (including domestic business) in or from within Guernsey. Before now Lloyd's has been viewed as a
'recognised insurer', which has meant underwriters have only been permitted to write Guernsey insurance business from London on a cross-border basis. The new licence permits Lloyd's underwriters to write insurance business locally through cover holders and for managing agents to establish service companies in Guernsey.
In addition, UK groups may be further attracted to establish reinsurance operations in Guernsey by proposed changes in UK taxation law. It is planned that from 1 April 2009 UK companies with overseas subsidiaries whose business is substantially third party transactions – such as reinsurers – will become exempt from paying UK tax on the dividend returned to the parent.
This provides extra flexibility and enables decisions to be made for purely business reasons. It is beneficial to UK groups with subsidiaries, no matter where they are located. However, the changes actually make Guernsey even more attractive in comparison with some of its competitor domiciles. Provided the right conditions are satisfied, the absence of taxation in the UK at parent level, combined with Guernsey's zero rate of tax for insurance companies, means that a UK group with a Guernsey reinsurance vehicle can ensure return on capital deployed is maximised.
In talking to a number of key players in this field, we have found that there is considerable demand in the capital markets for insurance linked investment opportunities. Further, we have found that many European based organisations did not realise that they could conduct this business in a location so close to them.
I believe that Guernsey has the expertise and resources to provide a high quality service for these deals and the organisations instigating them.
For more information about Guernsey's finance industry please visit www.guernseyfinance.com.
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