Originally published in International Reinsurance Review 2009/10, October 2009
Guernsey has been at the forefront of the captive insurance industry in excess of 30 years. During that time it has seen the sector grow beyond all recognition, while bearing witness to management improvements, leading to business capacity expanding, without excessive drain on personnel resources. These developments and efficiencies, combined with close proximity to London and European insurance centres, mean that Guernsey is in an unrivalled position to deliver the same services to insurers and reinsurers publicly declaring their desires to develop business portfolios in a well regulated, low tax and insurance focussed jurisdiction.
Guernsey's development in captive insurance has been steady, long-lasting and of benefit to all stakeholders. The Island has already embarked on the same route in the reinsurance sector and this article seeks to examine how Europe's leading captive domicile has positioned itself to be the alternative domicile of choice for London and European reinsurers.
Evolution and development
The insurance industry, including the reinsurance industry, has over a number of years not only rebranded, but also developed new and refined product lines. Rollover policies became time and distance policies, developing into finite risk covers and now branded as alternative risk transfer. Political threats in the late 1970s created opportunity for commercial insurance markets to stand alongside, and develop from, the position of governments underwriting export trade insurances, and captive insurance has developed from its fledgling position of the late 1950s to a multibillion pound insurance sector embracing global markets. The insurance industry has continuously evolved to support commerce and to develop new opportunity for shareholders and stakeholders alike.
There is no doubt that industry development is not confined to the underwriter's box at Lloyd's or City brokers' offices but, in equal measure, relies also on an effective infrastructure and responsive legislation and regulation. It is in this area that Guernsey has shown its ability not only to respond to changing political and economic conditions but, in so doing, to listen to and address the wishes of its industries as a whole.
At the forefront of Guernsey's development lies its finance sector which has, over a 40-year period, underpinned the transformation of the Island from a horticultural centre and tourist destination to the present-day diversified international financial centre.
Many of the Island's business sectors have been supportive of initiatives in other jurisdictions, but it is the insurance sector where the Island has particularly shown its preparedness to take risk and assume an international lead in key areas of development.
Captive insurance – the catalyst
Captive insurance can sometimes be considered the silent contributor. It presents relatively modest demands of management companies yet is a significant facilitator for other financial services activities. In turn, those other service providers understand the business which they support and the wider needs of the sector. In Bermuda, captive insurance paved the way for the arrival of major US carriers keen to transact business outside the US, but heavily reliant on the US for business flows. European liability settlements, mercifully, lag far behind those in the US, but the demand for lower cost solutions is a feature common to all markets. There was a time when the proximity of any 'offshore centre' to its marketplace was a major deterring factor to development – the further away the better, but that has long been displaced. Is Guernsey geographically too close to Europe?
Emphatically no and the Island, through its no nonsense approach to financial crime and business transparency has amply shown that business is conducted in the Island because of its reputation as a top tier finance centre.
Undeniably, the underlying development of a reinsurance sector, directly complementary to the pre existing captive sector, is not only in the interests of the Island but of crucial interest to UK and European insurers and reinsurers seeking a lower tax jurisdiction in which to conduct their business.
Guernsey's credentials as an insurance centre
Guernsey was the first European offshore centre to introduce insurance legislation, it was the first to redefine that legislation in the wake of changing international circumstances, it was the first to introduce codes of corporate governance in relation to the direction and management of insurers in the Island and it leads the way in developing an equivalence status to Solvency II. Its protected cell company legislation provided the global template for a sector that has seen the lion's share of captive oriented development in the last dozen years and the Island continues to support diversification of the insurance sector. Its pedigree, as an innovative financial centre, is without doubt and it is constantly evolving to ensure business interests are fully satisfied.
Change is both proactive and reactive. It arises not just from business development but also as a response to finance centre development and finance centre development also leads to business development. Intense pressure remains on low tax jurisdictions to demonstrate they maintain suitable substance and technical skills to support their industries, yet the truth is that the G20 had no choice, in the face of top quality infrastructure, to confirm Guernsey's position on the so called 'white list'. Underpinning this accreditation is the quality of legislation, regulation, transparency, education and management resources present on the Island. However, UK offshore territories, and the term offshore is used purely in its geographic context, continue to be seen as a political soft touch in the event of problems at Westminster.
Guernsey does not therefore simply prepare itself for a visit from the IMF and close the door thereafter until the next peer review, but it maintains an ever present commitment to high standards of delivery and development.
These high standards have seen the development of the Island's captive insurance sector to its leading present day position employing upwards of 300 people. However, the captive sector is not the only insurance activity as there lies an increasingly tapped, additional resource. The Island's domestic, life and reinsurance sectors all contribute to its insurance industry and, in turn the insurance industry is supported by banks, accountants, actuaries, investment managers and lawyers, providing levels of expertise that reflect best international standards. All of this is provided in a leading jurisdiction less than an hour's flight from London.
Guernsey is well attuned to the needs of the reinsurance sector with complete understanding of the support services required. All insurance and reinsurance support functions (law, accountancy/audit, actuarial, banking and investment management) are already present in the Island and its companies and insurance laws are widely recognised as setting premier league standards, yet without some of the more burdensome regulation that can be found elsewhere. Over many years the Guernsey Financial Services Commission has taken a pro-active position within the International Association of Insurance Supervisors and, as noted above, currently is making significant efforts ahead of implementation of Solvency II in the EU. Guernsey is not a member of the EU so its insurers and reinsurers are not swept into the fold of Solvency II compliance, but the application of Own Capital and Solvency Assessment, implemented by the Guernsey Financial Services Commission marked only the beginning of the Island's commitment to seeking equivalence status, providing a flexible response suited not only to the present day requirements of insurers, but allowing ongoing refinement to deliver shareholder and stakeholder protection for the future.
From a fiscal standpoint Guernsey companies, other than regulated banks which pay 10%, are taxed at 0%. The, so-called, 'zero/ten' tax regime, complemented by Tax Information Exchange Agreements, further reinforces the Island's position in relation to fiscal and financial transparency. There are no employment or sales taxes and personal taxation is at a flat rate of 20% with a variety of personal allowances. Standards of living are good and employees benefit from excellent healthcare, funded by a mix of state and personal contribution, and children's education is to sixth form level on the Island with access thereafter to UK universities. The frequent daily flights to the UK mainland, together with daily year-round ferry services, ensure that Islanders and new immigrants alike have no requirement to feel cut off.
A future in reinsurance
It is however the reinsurance sector where Guernsey now stands to deliver the greatest impact and to understand why it is worth reflecting on the growth of the captive management sector. While historians will tell you that Guernsey established its first captive in 1922, more recent growth stems from the removal of the UK's exchange control legislation from the statute book in the early 1980s. Prior to that time, with the easing of exchange control in the 1970s, Bermuda had provided a very convenient home for the development of US dollar reserves in the captive of a UK parented company; a shelter from the vulnerabilities of sterling at the time. The abolition of exchange control, at a stroke, placed Guernsey on a level playing field with added advantage provided by travel times, time zones and costs.
So the question has to be asked, as a domicile for reinsurers, is Guernsey prepared to play second fiddle? Certainly not is the resounding response. Undeniably, Guernsey cannot compete against the geographic position of, for example, Bermuda in relation to US markets – it would be of no economic value to any party to pursue such a policy. However, for a UK or European insurer or reinsurer, seeking a change in European territory, Guernsey through development of its insurance sector over a 30-year period, offers all attributes required for effective regulation, establishment, management and administration. At a time when certain UK insurers and reinsurers, including Lloyd's agencies, are on record as saying that the UK presents excessive costs and taxes, Guernsey provides an established, well regulated, attractive and cost effective solution. International driving forces have changed rapidly in the face of recession, financial regulation, consumer confidence and corporate governance. Guernsey, through its professional approach to business and its track history of unrivalled innovation, has undergone continuous change through deliberation and consultation. It is this continuous change that renders Guernsey particularly suited to development both of its reinsurance sector and ongoing provision of headquarters for insurance and reinsurance companies.
Guernsey's suitability to the needs of the insurance and reinsurance sector is not new, but the circumstances presented by global economic downturn, minimal investment returns and projections of a hard market to come, demand that different choices are considered and different requirements satisfied. A number of companies have already made the move to Guernsey – Barbican, Catlin, Hiscox and Canopius all have presence in the Island. Others are actively considering the Island as a future European base and recognise the benefits available.
It is the diversity afforded in Guernsey, through its multi-faceted finance businesses, that truly underpins its ability to assume the mantle as a reinsurance centre. As a consequence of investment returns being at almost record low levels, insurer business plans are seeing the reassertion of high standards of professional underwriting. Employee expertise, a favourable working environment, plentiful complementary services and zero rate tax all assist directly in supporting corporate aspirations to achieve profits in challenging times.
All of the changes, outlined above, come at a time when additional professional resource is available in the Island. Mergers and acquisitions have created a stronger captive management sector while, in parallel, creating a glass ceiling in career development for many. There has never been a better time to hire well experienced personnel resident in the Island. Training and development is a key focus of attention and the Guernsey Training Agency, (now the GTA University Centre accredited to the University of Bournemouth), is a joint initiative between the States of Guernsey and the Guernsey Financial Services Commission committed to the procurement, facilitation and promotion of high quality training to all sectors of the community. The Insurance Institute of Guernsey, a local Institute of the Chartered Insurance Institute, has some 300 members of which 75 are qualified at Associate or Fellowship level, provides educational support through examinations, career guidance and lecture activities while the Guernsey Insurance Company Management Association, as well as providing a forum for discussion of industry issues, offers courses of special interest to those in the insurance management sector. The requirement for insurance training is not only understood, it is pro-actively supported by government, commercial and regulatory stakeholders affording employers a first class pool of talent.
The Island is not a cheap place to live and work, but when contrasted with other domiciles, for example Switzerland, Ireland or Bermuda, it is very well positioned. Remuneration packages compare favourably with other international centres but lack many of the regular ex-pat requirements. Further advantage is secured both through time zone, travel times and associated costs. Day trips to and from the Island are easily undertaken to and from any number of UK cities with international connections via a number of hub airports. Housing is readily available both to rent or purchase and the Island's housing laws seek to accommodate corporate and personal requirements while businesses benefit from the availability of good quality office space, addressing requirements from modest underwriting rooms to full scale corporate headquarters.
Guernsey continues to have a pro-active captive management sector and its role should not be missed in assessing the needs and demands of the reinsurance sector. Already, a number of managers have seen advantages in promoting their services to reinsurers offering the wherewithal to host start-up facilities to insurers and reinsurers alike. Companies have thus been able to address start-up operations on a highly cost–effective basis allowing focus to address insurance and reinsurance issues rather than the general business administration that can so easily consume the time and effort of personnel in a new business environment.
Support and resource
Support and resource to business comes from multiple areas. While it is easy to say this resource is from government as the driving force, the reality is that multiple agencies are available to guide any new entrant through the processes involved. Meetings with the Guernsey Financial Services Commission – the Island's financial services regulator, Guernsey Finance – the financial sector promotional agency, the Commerce and Employment Department of the States of Guernsey and even Government ministers are all possible within a short timeframe, allowing a unique perspective as to the attributes of Guernsey as a leading insurance centre. Guernsey's parliamentary system is without political parties permitting long-term stability of government that, in turn, creates a platform where businesses can develop without the incumbent threats and changes afforded by party politics.
Guernsey has watched, listened and learned from developments and requirements of business in general, and the insurance sector in particular, over many years. This is not the tax haven of old, making a pitch for the in and out business that captives presented in their infancy, but an international insurance centre providing a well supported and highly credible response to changing market conditions. These changing conditions have permitted Guernsey to open its doors widely to reinsurers with a clear message, not only does the Island present as a leading financial jurisdiction but it has a clear understanding as to its ongoing development and how it is already assisting, and can assist further, in the strategic development of insurance and reinsurance businesses.
Guernsey Finance is grateful for the contribution to this article from Callum Beaton, Founder and Principal of Callum Beaton (Insurance Consulting) Limited.
For more information about Guernsey's finance industry please visit www.guernseyfinance.com.
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.