Guernsey's decision not to seek equivalence with Solvency II should not be seen as a sign its regulations are in any way lower quality than other jurisdictions, according to Martin Le Pelley, the immediate past chairman of the Guernsey International Investment Association.
When Martin Le Pelley became chairman of the Guernsey International Insurance Association (GIIA) in 2011, the island's insurance industry was very much in the process of redefining itself in relation to the outside world, particularly in relation to the rest of Europe. Indeed, Le Pelley took up his new role just as Guernsey was debating Solvency II equivalence.
"It was an interesting time as the insurance industry was against the idea, but the regulator was in favour. Thankfully the GIIA, as the industry trade body, was able to persuade the decision makers to hold back on seeking equivalence as it was clear it was not appropriate as a regulatory regime for the Guernsey insurance market," he explains.
At the same time, there was also a move to change the international perception of the Guernsey insurance sector from one that is totally defined by its well-developed captive insurance industry to a domicile also attractive to other kinds of insurance business. The captive industry also includes the 19 insurance management companies based on the island. The broad range of services provided by these companies hints at the diversified nature of the captive insurance industry as well as that of the much smaller commercial third-party insurance industry.
The latter is represented by companies such as Generali and Hiscox, which respectively write niche life and non-life international risks, often on a non admitted basis. The business model represented by these two companies forms a significant part of the GIIA's vision of a more diversified international insurance sector in Guernsey.
Variety and depth
Le Pelley stresses the variety and depth of expertise of the players in the captive market. "The insurance managers come in all shapes and sizes. The broker-managers Aon, Marsh, Willis and JLT are all represented, although they are not necessarily the largest insurance managers on the island." The selling point for the broker-managers, Le Pelley says, is they can offer their broking clients a captive service alongside their traditional broking activities.
There are also a number of independent insurance managers which cater for clients who value the captive service as a standalone product. "Their clients may wish to divorce their broker's services from the captive manager's services, and reduce any risk of conflicts arising. "Furthermore, by separating the broking and captive management, it gives the captive owner more control over their service providers. Finally, there are a number of brokers who do not have their own captive-management operations, and therefore prefer to recommend independent captive managers to their clients rather than passing business to their competitors," he says.
Indeed, the name of the insurance association itself is very much part of the redefinition referred to earlier. Fewer than 12 months before Le Pelley became chairman, the GIIA had been known as the Guernsey Insurance Company Management Association (GICMA). The new name is intended to reflect the changes that have taken place in Guernsey over several years and have been largely obscured by Guernsey's reputation as the biggest and most innovative captive centre in Europe.
The ability to continue to innovate is central to the future of the captive industry in Guernsey. The concept of the protected cell company (PCC) was devised in Guernsey in 1997. The PCC, or a variation on it, is the most widely used structure in the captive industry today. Cell companies are frequently employed in the area of insurance-linked securities to transfer catastrophe reinsurance risks to the capital markets. Guernsey was in the news last year when a cell structure was used to help mitigate against the risk of negative equity associated with the UK government's NewBuy mortgage schemes under which banks make loans of up to 95% of the value of the property to first time home buyers in England and Scotland. The use of these cell structures has contributed most to the growth of the insurance industry in Guernsey last year. Insurance was the only part of the island's financial services sector to growin2012. So, without downplaying the importance of the captive industry to the island, GIIA's new message is there is more to the future development of the Guernsey insurance sector than captives.
"The change of name was made to better reflect the make-up of the membership of the association, which consists of a variety of commercial insurers with Guernsey subsidiaries, such as Generali and Hiscox, as well as the many captive and third-party insurers under management," Le Pelley, who stepped down as chairman of GIIA after two years in the role, says. The GIIA chairmanship is a part-time position. In his day job, Le Pelley is director of compliance at Heritage, one of the largest independent insurance managers in Guernsey.
The word "international" in GIIA simply reflects the fact the association's core membership is involved in insuring non-domestic policyholders. "As such, the GIIA is concerned more with Guernsey's reputation as an attractive centre for niche or specialist non admitted or reinsurance products for use by international clients, rather than representing local brokers or insurers providing personal lines products to local residents. The international insurers represent the vast majority of insurers, both in terms of number and premium levels, operating in Guernsey," LePelley says.
The point is clearly demonstrated by the insurance market statistics issued by the industry regulator, the Guernsey Financial Services Commission (GFSC). According to the latest GSFC figures, the domestic insurance industry in Guernsey consists of eight insurers and 40 intermediaries. By comparison, the international insurance industry consists of 739 entities. This figure includes 269 companies. The vast majority of these are captive insurers but over the years, this number has increasingly included commercial insurance companies active in the traditional insurance or reinsurance markets.
One of the functions of the GIIA is to lobby local government, regulatory authorities and international bodies on behalf of the insurance industry in Guernsey. For Le Pelley, the biggest issue that arose during his tenure was undoubtedly that of Solvency II equivalence. "There is still much uncertainty over Solvency II, both in terms of its implementation date and the way in which different EU regulators will apply it."
Furthermore, Le Pelley says, there is uncertainty as to how equivalence would work. He is not un aware of the benefits of Solvency II. "As a regulatory regime for commercial insurers, Solvency II is prudent and a vast improvement on the existing regulatory regime. However, the 99.5% value-at-risk [VaR] confidence level built into the Solvency II directive makes it impossible to flex the regime for insurers that are not commercial/third-party insurers and do not possess the risk characteristics of a typical commercial insurer. As Guernsey's insurance market has very few truly commercial third-party insurers within it, the Solvency II regulations do not seem to address properly the regulatory requirements of Guernsey's market."
A major concern for the industry in Guernsey is a large number of captives would be left technically insolvent under the capital adequacy rules of Solvency II. The GIIA, Le Pelley says, lobbied hard to persuade the government in Guernsey to reject the offers of equivalence the European Commission had made, despite the GFSC wanting to accept them. However, the GIIA have since worked closely with the GFSC to develop an alternative risk-based solvency regime that is fully compliant with the International Association of Insurance Supervisors' (IAIS) Core Principle 17. Although this work is still ongoing, Le Pelley is optimistic it will reflect Guernsey in a very good light.
"It will evidence Guernsey's compliance with international best practice, while also freeing up the GFSC to regulate Guernsey's insurance market with a much more appropriate regime for the type of risks that are inherent within it," he says.
This raises the question of the implications of a non-Solvency II compliant regulatory regime for the non-captive insurance entities operating out of Guernsey. These are small in number, but that is likely to change in the future. For example, to what extent will these entities be negatively affected by the absence of a Solvency II-equivalent regulatory regime in Guernsey?
Le Pelley says it is important to remember Guernsey is not, and has never been, a member of the EU.
"As such, Guernsey insurers cannot take advantage of the Freedom of Services legislation that is available to other EU-domiciled insurers, and therefore the risk to EU citizens from Guernsey applying different regulatory requirements on its insurers is minimal, as the only way for Guernsey insurers to insure EU persons directly is though a non-admitted policy (if legal) or using an EU fronting company (in which case they are providing reinsurance)".
In addition, he explains, most insurers in Guernsey are captives, which means their risk appetite is aligned with their parent company's risk appetite, and this is also the insured party. "As a consequence, the imposition of a fixed regulatory 'confidence level' such as 99.5% VaR as per Solvency II, may not equate with the risk appetite of the captive's parent company such that this would then force the captive to hold too much capital unnecessarily, or else provide an inadequate level of insurance cover. It is for this reason, among others, the GIIA argued Guernsey should be allowed to regulate its insurance market to a level that matched with the risk appetite of the insured parties within it."
So, the way Le Pelley and the GIIA sees it, in the absence of Freedom of Services legislation in Guernsey, there is no real negative impact on the captive market from not having Solvency II equivalence. "In fact, most captive owners are relieved and glad Guernsey has taken this approach. Even the ability of Guernsey insurers to buy reinsurance or to obtain fronting arrangements seems not to be affected as most commercial fronting companies and reinsurers are using internal pricing models already to assess the price of the provision of fronting or reinsurance services to captives, whether inside or outside the EU," he says.
Another question is to what extent will the lack of a Solvency II equivalent regulatory regime in Guernsey affect the view of regulatory authorities in other countries about the quality of the arrangements in place in Guernsey? In other words, how will it affect Guernsey's reputation as a financial centre that is not only cost efficient but also has a responsible, rigorous, risk-based insurance regulatory framework in place?
Le Pelley responds by pointing out Solvency II is the EU's preferred regulatory approach for insurance.
"But it is not, nor will it ever be, the only regulatory regime for insurance. Indeed, the US is a much larger insurance market than the EU, and there are no plans for the US to apply Solvency II, or even for the US to obtain Solvency II equivalence in the short to medium term.
"As such, Guernsey is, and will continue to be, assessed by the International Monetary Fund and other international bodies against the recognized international regulatory standards as defined by the International Association of Insurance Supervisors [IAIS]. Guernsey has always sought to comply in every material respect with the IAIS core Principles and this won't change.
"Guernsey's decision not to seek equivalence with Solvency II should not be seen as a sign its regulations are in any way a lower quality than other jurisdictions. In fact, Guernsey is the most compliant jurisdiction in the world in relation to the IAIS core principles, and so should be regarded as the highest quality in relation to regulatory arrangements."
Change in government
While the GIIA's outlook is decidedly global, there was a need during his tenure as chairman, Le Pelley says, to explain the role of the insurance industry and raise its profile within Guernsey itself. This was due to the change of government in Guernsey after the elections in April 2012, which meant a whole new set of ministers came into power in May and the GIIA had to ensure the role of the insurance industry was properly represented within the new government.
This involved a number of meetings between GIIA and the new ministers, to raise their awareness of the issues of the day and seek assurances as to what the government was planning to encourage more insurance business to the island.
Le Pelley says he was greatly encouraged by the new minister for commerce and employment who has engaged constructively with the industry and is fully supportive of the opportunities for growth in the Guernsey insurance market. Lobbying the government is a hugely important activity for the GIIA given Guernsey's small population and tight immigration laws, which mean the availability of qualified insurance professionals is more directly linked to government policy than it is in other, more populous countries.
For example, the ability for nonlocal people to come to work in Guernsey is dependent on the availability of housing licences, which allow qualified and experienced people to live and work in Guernsey. "During my tenure we contributed to a consultation by the government on an overhaul to the housing licence laws that sought to free up the ability of companies to seek and recruit experienced non-locals for specialist roles," Le Pelley says.
There is a move to attract more business from Asian and Latin American captives to Guernsey. However, for companies based in these regions, there is the inconvenience of geographic distance and different time zones. So what has Guernsey got to offer captives from Asia and Latin America that other captive centres in the Caribbean, Singapore or Macau cannot offer them? For Le Pelley, the key to Guernsey's continued success as a captive domicile is down to the amount of experience the industry players have in this market, as well as the number and variety of players in the market. It is important, he says, for Guernsey to be both competitive and wide ranging in its areas of specialism.
Furthermore, he stresses the proximity to the London market. Guernsey is only a 40-minute flight from London. "Being close to one of the most important insurance markets in the world means Guernsey can work with all the specialist market participants in London, which place cover and manage risks for international companies on a daily basis. At the recent Captive Service Awards in London, Guernsey and its service providers swept the board in comparison to the other domiciles. This is because most captive owners are more concerned about ensuring their captive is operating in a well-developed, reputable market that is well regulated, rather than simply choosing a geographically convenient domicile. After all, as teleconferencing, social media and technology continues to advance, the world is becoming ever smaller."
Originally published by Insurance Day, March 2013
For more information about Guernsey's finance industry please visit www.guernseyfinance.com.
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