Off the back of a successful 2012, Fiona Le Poidevin of Guernsey Finance re-examines the healthy state of Guernsey's captive industry.
Last year was a great success for Guernsey as a captive insurance domicile with the jurisdiction remaining at the forefront of innovation in the sector – somewhere it aims to stay in 2013.
Latest figures from the Guernsey Financial Services Commission (GFSC) show that there were 737 licensed international insurers in Guernsey at the end of December 2012. During the previous 12 months, there had been net growth of 50 international insurers, with 97 additions and 47 surrenders. The fall in the number of limited companies was more than offset by the growth of protected cell companies (PCCs), incorporated cell companies (ICCs) and in particular, associated cells.
A large part of this increase relates to the UK Government backed NewBuy scheme, introduced by the UK's Home Builders Federation (HBF) and the Council of Mortgage Lenders (CML) in March last year, which 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 manages 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. The HBF PCC now has 50 related cells. The NewBuy scheme broke new ground in terms of the design of its insurance coverage and PCC structure and has now been replicated in Scotland. Called MI New Home, the scheme backed by a Scottish Government Guarantee launched at the start of September and once again is managed by JLT Insurance Management in Guernsey. At the moment the scheme has eight cells, soon to rise to 12.
Additionally, the Welsh Government has approved the scheme for Welsh homebuilders, who are also expected to use cells in the HBF PCC. It is hoped that this scheme will launch in the Spring of 2013. Other initiatives which have helped grow the market during 2012 include Igloo Insurance PCC's Housing Association PCC, which has seen six cells created, each for a different housing association.
Guernsey pioneered the cell company concept back in 1997 with the introduction of the 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 financial services world as an alternative application for the structuring of many different types of products. As well as adopting the similarly innovative 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. Furthermore, Guernsey allows for the inward and outward migration of companies and the amalgamation of companies. Towards the end of 2012 the Guernsey Parliament also gave its approval to make it possible for a cell of a PCC to convert into a standalone company and this change in legislation should take effect later this year.
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
Expertise honed in the captive insurance market and the use of cell companies has now led to Guernsey's latest innovative product – the risk purpose trust (RPT). An RPT is a mechanism, which allows corporates to fund effectively for foreseen and unforeseen expenses and business risks. It has been developed in 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.
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, the island's expertise in both the insurance and investment fields make it an ideal home for ILS arrangements. Bedell Cristin's Guernsey office has provided legal advice to Swiss ILS managers Solidum Partners AG for establishing Guernsey reinsurance structures and a related catastrophe reinsurance risk listing on the Channel Islands Stock Exchange, which is the first private catastrophe bond listed on any exchange worldwide.
In January 2011 Guernsey announced it was not seeking equivalence under Solvency II, which may now not be implemented until 2016 at the earliest. 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 in its current state it would burden insurers in Guernsey with additional costs and render currently effective captive business plans uneconomic.
Officials in Guernsey understand that the finalisation 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 currently seeking equivalence under Solvency II.
Indeed, a number of Guernsey practitioners have recently reported receiving instructions to migrate captives from Bermuda to Guernsey, due to the uncertainty created by that equivalence and the Solvency II delays generally.
Guernsey's attractiveness has been reinforced by the fact that the EU formally approved the island's zero-10 corporate tax regime in December last year, while Guernsey has now signed Tax Information Exchange Agreements (TIEAs) with 38 jurisdictions and 13 Double Taxation Arrangements (DTAs). We continue to work on extending our network and there are several other agreements in the pipeline.
Guernsey is ranked as the number one captive insurance domicile in Europe and the fourth largest globally. The island plays host to subsidiaries of global names such as Aon, JLT, Marsh and Willis, as well as independent, boutique operators such as Heritage Insurance Management, Alternative Risk Management (ARM) and Kane, which
also relocated its global head office to Guernsey towards the end of last year. The sector is also complemented by banking, investment and fiduciary sectors and supported by a network of professional services, including legal, tax, accounting and actuarial advisers.
The strength of Guernsey as a captive domicile is underlined by the fact that approximately 40% of the leading 100 companies on the London Stock Exchange with captives have them domiciled in the island. Indeed, a significant majority of the international insurers licensed in Guernsey have their parent company located in the UK, however firms from around the world have all established captives on the island. 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 last year,
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?"
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.
Guernsey's key facts
Guernsey continues to retain its position as the leading captive domicile in Europe and number four in the world. Approximately 40% of the leading 100 companies on the London stock exchange with captives have them domiciled in Guernsey. Guernsey pioneered the cell company concept when, in 1997, it introduced the protected cell company (PCC). It has since also introduced the incorporated cell company (ICC).
Numbers of entities
There were 97 international insurance licenses issued during 2012, which is a 35% increase on 2011. This helped push the net total number of international insurers licensed in Guernsey up by 50, from 687 at the end of 2011 to 737 at the close of 2012.
Value of business
There has been steady and sustained growth in the value of international insurance business in Guernsey. The value of gross assets has increased markedly in recent years, reaching £21.8bn ($35bn) in 2011. The net worth of insurance business in Guernsey reached £9bn ($14.5bn) in 2011 – up 32.4% compared to 2008. In 2011, premiums written were £4.6bn ($7.4bn), which was a rise of £0.5bn ($0.8bn) on 2010.
Location of parents
New captives, PCCs, ICCs and cells licensed in Guernsey during 2012 were predominately established by UK parent companies (80%). This was due in most part to the HBF PCC and MI New Home PCC cells that have been formed as part of the UK Government-backed NewBuy scheme, which was launched by the UK's Home Builders Federation (HBF) and the Council of Mortgage Lenders. However, the island still boasts a truly international insurance sector, illustrated by the fact that the spread of new business includes Europe (Ireland and Luxembourg), the US-Caribbean (US and Cayman), Africa (South Africa) and Asia/Pacific (Japan and Australia). This is all in addition to existing business that is spread across these regions and beyond.
Originally published by Captive Review, February 2013
For more information about Guernsey's finance industry please visit www.guernseyfinance.com.
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