Dominic Wheatley, Chief Executive at Guernsey Finance, explains how Guernsey's captive insurance expertise could allow brokers to tap into an additional flow of income.
Brokers, like the rest of us, will be eager to tap into any possible additional flows of income. They will be interested to learn more about a potential new revenue stream for their business offered by producer-owned (re)insurance companies.
Conventionally, brokers just earn commission for placing client insurance policies with the commercial insurance market. The use of a producer- or broker-owned (re)insurance vehicle, however, can give brokers access to underwriting profits usually retained solely by the insurer.
A broker can sponsor and establish its own (re)insurance company where a proportion, or even all, of their client risks can be insured. In certain circumstances, the company can be used to insure on a direct basis or via quota share reinsurance arrangements with the existing insurer. Protected cell companies (PCCs) or incorporated cell companies can provide the optimal structure to insure or reinsure the risks of several different clients by underwriting their respective exposures into separate cells. These structures offer the following advantages to brokers:
- the potential to earn underwriting revenue in addition to commission;
- enhanced risk management control;
- the ability to identify, and therefore benefit from, good quality business with a low claims ratio;
- a hedge against hardening market rates and reduced commissions;
- pricing and cover flexibility;
- access to reinsurance markets; and
- they enable the broker to provide an enhanced service, generating even more value from existing business.
So where can brokers access this?
The Guernsey difference
Guernsey is a jurisdiction that offers an experienced, innovative and professional risk management sector specialising in captive insurance, reinsurance and insurance linked securities, part of a broad based and internationally focused insurance industry.
The island is home to multinational risk management companies as well as independent captive insurance managers who together service more than 800 licensed international insurance entities. Guernsey is the largest captive insurance domicile in Europe and fourth globally. This strength is underlined by the fact that about 40% of the leading 100 companies on the London Stock Exchange have captives domiciled in Guernsey.
Indeed, a significant majority of the international insurers licensed in Guernsey have their parent company located in the
UK. The island's insurance sector is truly international, however. Firms from across Europe, the US, South Africa, Australia, Asia, the Middle East and the Caribbean have all established captives on the island.
A major draw is the cell company concept that Guernsey pioneered in 1997 when it introduced the PCC. This means that the island has unrivalled experience and expertise in cell company structuring. For example, Aon's White Rock
Insurance Company PCC Ltd was established in Guernsey as the world's first PCC and has been used by more than 50 corporations as a cell captive facility. And Guernsey-based Heritage Insurance Management achieved a worldwide first in 2010 by amalgamating two PCCs – with 17 cells between them – into one.
Outside Solvency II
Guernsey is not within the European Union and therefore is not required to implement its directives, including Solvency II. So it is not seeking Solvency II equivalence as its requirements are not proportionate to the risk levels within many of our insurance and reinsurance vehicles.
But Guernsey continues to adhere to the insurance core principles of the International Association of Insurance Supervisors (IAIS), which provides proportionate regulation to the specialist insurance market.
A new revenue stream Guernsey offers an ideal environment for brokers establishing a producer-owned (re)insurance company. Compared with simply using the commercial insurance market, these structures potentially offer significant advantages, not least the prospect of a new additional revenue stream. We would encourage brokers to learn more by speaking with us or our colleagues at risk management providers in Guernsey.
An original version of this article was published by Insurance Times, December 2014.
For more information about Guernsey's finance industry please visit www.guernseyfinance.com.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.