Guernsey's lofty reputation within the insurance industry didn't happen overnight or without merit. Fiona Le Poidevin of Guernsey Finance gives an overview of the successful innovations the island has played host to in the past that now make Guernsey a 24 square mile innovation lab for the captive industry.

Innovation has been at the heart of Guernsey's continued development as a leading international finance centre.

The jurisdiction's mix of talent, independence and foresight has allowed financial services to flourish and resulted in Guernsey practitioners being among the most innovative in the world.

Guernsey's origins in the insurance industry actually date back to the 18th century, while the island's first captive insurance company was incorporated in 1922. Since then, Guernsey's insurance market has grown to the extent that research from Captive Review recognises the island as the largest captive domicile in Europe and number four globally.

Risk purpose trust

It is the expertise honed in the captive insurance market that has led to Guernsey's latest innovative product - the risk purpose trust (RPT). An RPT is a new mechanism, which allows corporates to fund effectively for both foreseen and unforeseen expenses and business risks. Developed on Guernsey by Princeps, a joint venture between Robus Group (a Guernsey-based provider of insurance management and corporate services) Marlborough Trust, (a Guernsey-based independent trust company) and Richard Gale (an independent consultant with 40 years' experience in insurance broking and captive management), the RPT acts as a repository for funds which are then used by the corporation to fund their foreseen and unforeseen risks. The RPT receives contributions from the corporation to fund those risks and uses those contributions to support the corporation.

The RPT's varied uses range from budgeting assistance for gratuity payments, incentive payments or sports bonuses; provision for future repair costs or replacement costs; rental guarantees for landlords of large property portfolios; pension shortfalls, and the support and provision for unforeseen risks of corporates generally, from the traditionally insurable to the non-insurable.

Before adding the RPT to its offering, Robus Group already provided services to captive insurers, open market insurers and reinsurers, insurance intermediaries and insurance linked securities (ILS) fund managers. Indeed Guernsey's expertise in ILS was demonstrated back in 2011, when law firm Bedell Cristin's Guernsey office advised Swiss ILS managers Solidum Partners AG on a groundbreaking CAT bond transfer, namely a private transformer of catastrophe risks into $12.4m of securities in three separate deals through a Guernsey-based incorporated cell structure, Solidum Re.

Cell concept

Guernsey's position as a captive domicile was strengthened back in 1997 when Guernsey practitioners pioneered the cell company concept with the introduction of the protected cell company (PCC) for use in the captive insurance sector. The subsequent success of this innovation is illustrated by the fact that the cell company is now used across the fi nancial services world as an alternative application for the structuring of many different types of products. As well as adopting the similarly innovative incorporated cell company (ICC), the island has, through legislative advancements, developed a regulatory infrastructure that enables them to be widely employed.

The island also boasts provisions that give notable flexibility to cell company structuring arrangements, in particular: an ordinary company can convert to a PCC or ICC; a PCC can convert to an ICC; an ordinary company can convert into an incorporated cell (IC) and become part of an ICC; and an IC can leave the umbrella of the ICC and convert into an ordinary company. Furthermore, Guernsey allows for inward and outward migration of companies and the amalgamation of companies.

Other examples of Guernsey's innovation and expertise in the cell structure field include:

  • Aon's White Rock Insurance Company PCC Limited was established in Guernsey as the first PCC in the world. Since inception it has been used by more than 50 corporations as a cell captive facility and grown to be the largest structure of its kind globally
  • White Rock Insurance (Guernsey) ICC Limited - also Aon owned - was the first ICC in the world to be insurance licensed
  • Guernsey-based Heritage Insurance Management achieved a worldwide first in 2010 by amalgamating two PCCs - with 17 cells between them - into one

Captive growth

Continued recognition of Guernsey as the European captive leader has been borne out by the number of international insurance entities licensed in Guernsey growing by 54 so far this year. Figures from the Guernsey Financial Services Commission (GFSC) show that there were 687 international insurers listed on the island at the end of December 2011, but that this has now risen to 741 at the end of August 2012, comprising 252 companies, 400 PCC cells, 67 PCCs, 5 ICCs and 17 ICC cells.

Much of this increase relates to a UK government-backed product utilising Guernsey's experience and reputation for innovation and expertise in the use of cell companies. The mortgage indemnity insurance scheme, introduced by the UK's Home Builders Federation (HBF) and the Council of Mortgage Lenders (CML) in March, sees mortgage risk for the lenders on new build homes underwritten by house builders and the government. By insuring the risk of default losses, the NewBuy scheme allows lenders to offer 95% loan to value mortgages on new homes. The JLT Group is managing the scheme through a joint initiative of its operating companies, including JLT Insurance Management (Guernsey) Limited which is running the captive insurance company established for HBF.

JLT Insurance Management (Guernsey) managing director Nick Wild believes the NewBuy scheme has broken new ground with many aspects in the design of the insurance coverage and PCC structure, while Guernsey's PCC legislation had once again proved its flexibility. At the start of October, he reported to us at Guernsey Finance that there were currently 46 cells in the captive insurance company established for HBF PCC.

The mortgage scheme itself is also proving popular with the hope it can fund the purchase of 100,000 homes over the next few years. Such has been its success that it has now rolled out across Scotland, backed by a Scottish government guarantee called MI New Home. Launched on 12 September, MI New Home Insurance PCC already has six cells - with the expectation for this to double by the end of 2012.

The strength of Guernsey's captive insurance sector is further underlined by the fact that approximately 40% of the leading 100 companies on the London Stock Exchange with captives have them domiciled on the island. Indeed, some 60% 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 USA, South Africa, Australia, Asia, the Middle East and the Caribbean have all established captives on the island.

It was with this pedigree in mind that Guernsey decided against seeking equivalence with Solvency II, which may now have its implementation delayed beyond 2014. The island wanted to give current and potential clients certainty and clarity regarding the regulation of insurance business in Guernsey. The island also believes applying Solvency II as it is presently constructed would burden insurers in Guernsey with additional costs and render currently effective captive business plans uneconomic.

Other non-EU jurisdictions such as Bermuda and Switzerland are adopting a different stance. These countries were in the first wave of equivalence applications. They were not seeking equivalence for their captives but to protect their commercial reinsurance industries and Bermuda in particular is seeking to mitigate the impact on its captive business. There is still a degree of uncertainty surrounding equivalence and what this means for third countries.

Officials in Guernsey understand that the finalization of the transitional provisions may depend on the actions of the European Parliament and the European Council. Until their position is understood, there will remain a degree of uncertainty about how it will progress. On this basis, Guernsey remains committed to the policy outlined in January 2011 that it is not as of now seeking equivalence under Solvency II.

Ringing endorsement

Oil giant BP has its own captive insurance company, Jupiter Insurance, domiciled in Guernsey, as does global mining company BHP Billiton through Stein Insurance Company, which has assets of approximately $1.3bn and had revenue of $214m in 2011. Stein covers property damage, business interruption, construction, terrorism, marine cargo and some primary general liability for BHP Billiton.

Matthew Frost, vice-president of risk finance at BHP Billiton, told Captive Review in July that the Australian company's finance risk management committee looked at the issue of domiciles about 18 months ago, particularly when it significantly increased its self-insurance, and asked itself if BHP Billiton was starting "all over again from scratch, given where the management teams are based, would we have a captive and, if so, where it would be located?". Mr Frost said Guernsey came out on top along with Singapore, but that after establishing the pros and cons of each domicile, "Guernsey came out significantly ahead".

That fantastic endorsement of the island comes as no surprise when you consider our innovation and expertise across the risk management sector.

Originally published in Captive Review, November 2012

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