With the captive industry becoming caught up in ongoing financial uncertainty around the world, Dave Bartram of Barclays takes a look at the services and structures available in Guernsey for captive managers in these tough times.

The captive insurance sector in Guernsey has undergone a great deal of change in the past 12 months which has been largely driven by the continued challenging global economic situation, with captive managers rightly demanding more from their service providers to ensure that Guernsey remains a leading player in the industry.

There is a greater availability of service providers now than has existed historically and with this enhanced availability providers have been forced to look to new ways of assisting the sector to remain at the forefront of captive managers' minds. Barclays' offering is continually evolving in response to the demand for excellence by our clients; meaning that a broader range of solutions delivered by the on the-ground Barclays captive team is now available.

This will help to ensure that Guernsey remains a dominant force in the global captive insurance industry. Barclays has operated in the captive industry for a number of years and throughout this time has maintained a presence in Guernsey which is widely acknowledged as the leading captive location in Europe.

From a banking perspective, the captive insurance sector is of great interest for many reasons. Although the needs of captives have historically been relatively basic compared to those of other sectors, key requirements from their bank include the ability to hold cash (while offering a strong rate of return) and the ability to provide letters of credit against the cash held. The demand for these facilities and the availability of banks in Guernsey willing to offer these facilities has led to a decrease in the cost of these facilities and therefore the rate of return available with the assets under management has been impacted.

Global presence

Barclays as a global bank works closely not just with the Guernsey market but also with other major captive centres in Europe, the Caribbean, Bermuda and the US. This global presence and feedback from our local clients, has fuelled our appetite to start expanding the product sets available to the Guernsey market, and in doing this, we have engaged in much discussion with local captive managers - we see the future of banking for the captive sector as an exciting, growth market. For some time, the captive industry on the American side of the Atlantic has had the capacity to set up Regulation 114 agreements, something that has not been available in the Guernsey market.

Through client demand we have now put in place the Barclays Security Trust Arrangement (STA) which means that rather than pledging cash to support a letter of credit, clients can use Barclays Wealth Trustees to utilise and improve returns on assets and aren't required to liquidate bond portfolios, money funds and investment management portfolios into cash. There is no credit requirement and the mechanism means that clients can adjust the collateral to the underwriting requirements throughout the year, so they are not over-collateralising ('stacking') the position.

A considered obstacle to this product has been the appetite of fronting insurers to support an STA in place of a letter of credit. We have resolved this obstacle by gaining the agreement from a number of the fronting insurers in advance and collaboratively gaining their input into the product design. This is a product that is still in its infancy in Guernsey but is the predominant vehicle of choice for captives in other major captive jurisdictions. It has also gained strong support from a number of the captive managers on the island and we see this as a real growth area for Guernsey in 2013. Another advantage of the STA is that, while you may agree a margin on a portfolio to support the underwriting requirement, you are effectively spreading the risk across a number of assets and increasing capacity. In addition, as the STA is not a credit product, there are potential cost benefits.

As regulators continue to require banks to increase the level of capital they hold to support credit facilities, which is likely to lead to increased upward pressure on LoC prices, the STA could be a more cost-effective alternative.

With the financial crises that have hit the world over the past few years, and no strong view on when the uncertainty will end, the return being offered on cash deposits has dropped significantly during this period – with no significant pick up expected in the short to medium term. Consultations with captive managers in Guernsey have highlighted this as being of concern, not only for the managers but also for the parent companies. In some instances this has even called into question the validity of having a captive. With little alternative available in the local market, we have looked to the broader experience we have as a group and sought out guidance as to other non-cash alternatives that are currently being used in other jurisdictions.

As well as the STA product assisting with removing the stacking of premium's that are tied up in cash, we have introduced a new member to our captive team in Guernsey, Colleen McHugh. Colleen is a corporate investment advisor with significant experience in the captive sector, having previously worked in Bermuda where she provided non-cash asset solutions. We are in advanced discussions with a number of local captive managers as to what the ideal product looks like, and we are looking to leverage the wider Barclays Group to build different products to meet this demand. Again, this is something we consider based on feedback to date, will be popular in 2013. As a business we have also invested and are bringing to the island access to a state of the art investment and asset management platform which will offer our clients greater flexibility and information on assets under management.

Tight partnership

Captives should be integral to the parent company's strategic and tactical risk management. It is much more efficient for a captive's bank account to be with the same global banking institution as the parent. Barclays in Guernsey works extremely closely with the wider group to ensure a seamless service is provided to both captive and parent. It is important that the parent has representation on the captive board and that there is a dedicated risk manager who treats part of those duties seriously and makes the whole business case much more robust. We are becoming more acutely aware of this fact and have been able to structure solutions over the past 12 months which have holistically considered the needs of the client instead of viewing the two as discrete entities. Communication between a bank and its captive managers has also needed to improve over the past few years.

Historically, counterparty diversification and safety has not featured as prevalently as it does now and it is this change that has really driven better and more transparent discussions between banks and captive managers. We are constantly being asked to outline our current ratings with agencies (Moody's and S&P) and becoming more involved in discussions to assist captive managers to achieve the diversification they are seeking in a cost-effective manner. The credit rating of the bank is important for the captive and parent's assessment on assets held within it. It also reflects upon the bank's management quality and governance standards, which is particularly important in the case of parent companies considering offshore captives which may be unfamiliar with small overseas jurisdictions.

A solution that is growing in popularity is the use of our cash management service by which we access a broad range of banking counterparties within a captive's guidelines and gain access to cash solutions they offer. To do so, we only require an account to be opened with us preventing duplication and administrative work. In summary, the drive by the captive managers in Guernsey to continue to grow Guernsey's presence as a dominant jurisdiction in this sector has had a direct impact on the solutions and demands they have made of their service providers. Barclays has responded to this with internal investment to bolster our support to the sector through innovative product and greater access to the strength of the group; all delivered by the local Barclays captive team. Guernsey captive managers need to continue to push their service providers as they evolve solutions to their clients to stay at the forefront of the industry.

Originally published by Captive Review, February 2013

For more information about Guernsey's finance industry please visit www.guernseyfinance.com.

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