David Riley of Marsh Guernsey gives an overview of the main points to keep in mind when considering a captive insurance solution in Guernsey.
As a historically strong captive jurisdiction, Guernsey's expertise in the sector continues to be a driving force for the island's success. With an increasing number of licensees year-on-year and stable growth across the range of captive insurance entities, it is clear that Guernsey's popularity remains. David Riley of Marsh Guernsey talks to
Captive Review about one of Europe's leading captive domiciles.
Captive Review (CR): When it comes to captive insurance solutions, how does Guernsey compare to other jurisdictions and what are the benefits and challenges that come with establishing a captive in the jurisdiction?
David Riley (DR): For a mature domicile, Guernsey continues to demonstrate a growth in overall licensees. This has mainly come about through the identification of niche areas and successfully convincing structure owners of the benefits. Furthermore, the range of cell and captive structures available make it easier to meet individual needs.
From a Marsh Guernsey point of view, both enquiries and requests to form captives are rising.
The reasons for this include:
- Access to reinsurance markets for non-standard covers
- A desire to share in insurance risk as a way to improve return on capital
Another part of Guernsey's strength lies in its approach to regulation. The certainty that Guernsey is not subject to Solvency II is attractive to both clients and prospects.
Some of the trends that we have noted include:
- When setting up captive programmes it is vital that exit strategies are considered. It is much more efficient to do this at the start of the policy rather than waiting until it has been in run-off for a number of years with potentially different people involved.
- There is an increased interest in the use of captives to fund employee benefits. In times of austerity there is a focus on getting maximum impact for all areas of expenditure.
- Changes to the UK Controlled Foreign Companies (CFC) regime have generated interest in both new formations and how existing insurance programmes are structured.
CR: What is the main point a captive owner needs to keep in mind when establishing a captive solution in Guernsey?
DR: While the regulatory regime is proportionate in Guernsey, it is important to bear in mind that it has the power and sanctions necessary to ensure that captives are well run. In addition, the regime continues to change to meet the requirements of the International Association of Insurance Supervisors, and work is underway to develop a risk based solvency regime to meet the requirements of Insurance Core Principle 17. It is anticipated that a quantitative impact study will be undertaken in 2013.
CR: How is the use of technology for captive solutions developing?
DR: Globally, we are seeing an increase in the need for technology to evolve to meet changing and enhanced regulatory requirements. For example, with Solvency II there is a clear requirement to maintain data with better integrity and increased granularity. While Guernsey is not subject to Solvency II, the Guernsey Financial Services Commission announced the launch of 'Project Sentinel' in November 2012. This is a move towards improved efficiency by having an electronic reporting platform for most licensees. Marsh Captive Solutions is working in a number of domiciles to implement electronic reporting systems to ensure that our clients are able to meet these enhanced requirements. Marsh Guernsey is part of the project team on this initiative.
CR: What do captive owners need to keep in mind when it comes to technological innovations and how they can be used in captive solutions?
DR: There is always a need to critically appraise the systems on offer to ensure that they are fit for purpose. There are some quite significant differences between the core systems used by insurance managers and clients need to ensure that they are getting the maximum efficiency. Systems should not only be appropriate today, but there should be a demonstrable investment to ensure that this continues to be the case.
CR: In what ways can the use of surety bonds be more effective than the issuance of letters of credit (LoCs) and how has this changed over the past couple of years?
DR: The main advantages of replacing LoCs with a surety bond are:
- Freeing up banking limits – the capacity provided by a surety bond does not impact on a group's core banking facility, thus freeing up working capital for core business activities.
- Pricing – insurers price risk in different ways to bankers and hence, there can be pricing differentials which could benefit clients.
- Additional capacity - additional capacity is available to groups for other guarantee requirements they may have, and there would be no cost implications of having the additional capacity available. Costs are based purely on
CR: If a letter of credit is in place as part of a captive solution, how easy would it be to replace it for a surety bond?
DR: It should be noted that surety bonds are not a 'one size fits all' solution and the target market is currently:
- Turnover in excess of £1bn
- Security requirements in excess of £5m
However, a number of well-known insurers are happy to accept a surety bond instead of a letter of credit, indicating their growing popularity.
CR: What is meant by LoC stacking and what would be a potential solution against it?
DR: LoC stacking arises when fronting insurers are quick to request security for new underwriting years and are slow to release security for earlier years. This can generate a situation where a captive may have significant assets but as these are pledged to secure LoCs, there are consequently few free funds to pay claims.
Originally published by Captive Review, February 2013
For more information about Guernsey's finance industry please visit www.guernseyfinance.com.
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