Guernsey's strength as a captive domicile has been decades in the making, with the country's first captive being established in the 1920s.
It stands as the number one captive jurisdiction in Europe and the fourth worldwide, licensing 99 new captives in the year ending March 2014 alone. Despite this established industry, Guernsey is still driven by looking for solutions to what clients require.
Kate Storey, counsel in the corporate and commercial department at Appleby, comments: "Guernsey pioneered the protected cell company (PCC), in which the assets and liabilities of each cell within the company are segregated by law, and this structure has been widely used with great success in the insurance sector. We are now seeing a trend towards Guernsey's incorporated cell company (ICC), as the legal segregation offered by each cell being a separate company is perhaps more easily understandable for clients from some jurisdictions."
Guernsey's ICC is also proving increasingly popular for a range of insurance structures, including captives, rent-a-captives, transformers and insurance-linked securities (ILS). Storey states that, in the last 12 months, there has been a massive increase in enquiries regarding ILS structures. Although these vehicles have traditionally been done out of Bermuda, there has been a shift emanating from London law firms and sponsor insurers to begin focusing on Guernsey as the jurisdiction of choice for ILS.
Under Guernsey law, there is no risk of insolvency for ILS, as the loss cannot exceed the level of exposure, so the regulator is informed and the collateral is secure. There has been interest in recent months from Europe and worldwide, and the recent Guernsey Finance-fronted ILS conference in Zurich was also "well received by major investment and insurance players", according to Storey.
Further clout has been put behind this push through the establishment of dedicated departments. Compliance director for Heritage, Martin Le Pelley, says: "The Guernsey International Insurance Association (GIIA) and Guernsey Investment Fund Association (GIFA) have teamed up to put together an ILS sub-group designed to explore the broader opportunities for Guernsey from a two pronged attack—the insurance market and selling it to investment markets."
Although others such as Malta and Gibraltar have been jumping on the ILS bandwagon, compared with the likes of Bermuda and Guernsey, the EU domiciles could be at a disadvantage due to the impending implementation of the Solvency II.
Storey continues: "We worked on a major marine reinsurance ILS structure at the end of 2013, where we acted for the fronting insurer. That involved use of a Guernsey special-purpose vehicle (SPV) to act as reinsurer, with capital markets investors investing into and funding the structure. We have also recently dealt with an ILS structure for insuring lotteries risk."
Referrals to Guernsey are common from London law firms, but sponsor insurers or companies that have captive requirements have recently been coming from Spain, the US, France and the Middle East. Appleby also recently had an enquiry from a Singapore-based captive insurer that was keen to employ ILS through Guernsey. While the Internal Revenue Service (IRS) in the US is pursuing a crackdown on captives—Guernsey has no such worries.
The UK's revised controlled foreign company rules now allow a Guernsey-based company to make £500,000 per year in profit in a cell without having to pay tax until it is distributed. Le Pelley explains: "The US IRS is scrutinising captives because they are so popular. I've often said any company that manages its risks better can make more profits, which themselves are taxable, rather than taking big risks and incurring either big profits or big losses. This makes captives more stable, if anything, from a tax revenue generating perspective."
An original version of this excerpt appeared as part of wider roundtable which was first published in Captive Insurance Times, October 2014.
For more information about Guernsey's finance industry please visit www.guernseyfinance.com.
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