While the captive industry is undeniably dominated by US domiciles and their neighbouring offshore competitors, the small island of Guernsey still stands toe-to-toe with the biggest names in the business, writes Stephen Durham of Captive Insurance Times.
Much is made of the fact that Guernsey is the lone European representative in many of the 'top 10 captive domicile' lists in recent years, but less is known of the reasons why. What can be argued as chief among these reasons is the island's propensity to embrace new forms of business—namely, the industry's financial instrument du jour, insurance-linked securities (ILS).
"As well as continuing to attract traditional captive companies, a significant proportion of the Island's new business relates to ILS. This business is particularly pleasing as it combines the expertise of the island's insurance managers with those of its legal, banking, and investment sectors," says managing associate at Mourant Ozannes, Helen Wyatt.
Of the business written in the 12 months to 31 December 2014, 45 percent was in ILS, while insurance lines covering property (13 percent), life and health (8 percent), and after-the-event legal expense were (7 percent) also prominent. Also something of a growth segment for Guernsey in recent times has been a burst of longevity risk transfers. The island's first instance involved the Prudential Insurance Company of America completing what was believed to be the largest longevity risk transaction ever, assuming a quarter of the scheme's longevity exposure, thereby hedging around $16 billion of liabilities.
The transfer of pension longevity risk is where the captive is used to access reinsurance markets. In many cases, life companies are keen to provide reinsurance cover, because the longevity risk is a natural hedge against those insurers' normal life exposure. Ian Morris, partner and head of insurance services at BWCI, explains: "The longevity structures transfer large amounts of risk but the capital requirements are limited as the risk is primarily reinsured."
"The deals to date have been from the UK so most clients are familiar with Guernsey and its insurance expertise. Clients have looked at a range of jurisdictions but concluded that Guernsey is the most suitable location. I would not expect such business to be written within the EU due to the additional costs and capital likely to be needed to comply with Solvency II."
Another recent transaction saw Willis and Towers Watson working together to establish a facility for the Merchant Naval Officers Pension Fund (MNOPF). Although the reputation of Guernsey was cited by Willis as being an important consideration, the ability to establish an incorporated cell company (ICC) was a "key differentiator", according to Martin Best, managing director of Willis Guernsey.
Best continues: "The ICC structure provides for more robust segregation between cells, and allows the MNOPF model to be readily replicated for other clients. Longevity risk for pension funds is a growing issue, and the use of a captive to access reinsurance markets is a great solution. Towers Watson and Willis believe that there is a substantial market for this product."
The UK, more specifically London, is Guernsey's core market for captive and ILS business, and it enjoys a strong relationship with the US and Caribbean. Even so, this has not stopped the island's financial services industry from seeking out pastures new.
Emerging markets are becoming increasingly aware of the captive concept, according to Wyatt, and Guernsey has already attracted business for captives from parent firms based in Saudi Arabia, South Africa, Colombia and Singapore. China also represents a lucrative market for captive business, despite it developing its own onshore captive domiciles in free trade zones. However, many believe that the potential smorgasbord of new markets to explore does not necessarily mean guaranteed new business. As well as China's own onshore ambitions, Best says: "It is extremely difficult to export premium from India, so we don't expect to see new business from there.
Some South American companies are indeed looking to establish captives, but they are typically looking to the Caribbean."
In addition to this, it can be argued that the level of austerity over the last few years has slowed the volume of new business and available capital, which in turn has meant a limited appetite in parent entities outside Guernsey for new ventures. But, according to Morris, this seems to be changing recently based on the type and number of new entities in Guernsey this year. Robus CEO Chris Le Conte says: "Austerity impacts us all of course, and has probably impacted on fee levels for managers and general cost-cutting, but equally the whole premise behind captives is to reduce costs through lowering the total cost of risk and so actually periods of belt tightening can be beneficial."
From 2007, Guernsey has seen a steady growth across the levels of gross assets, net worth and premiums written by its international insurers, according to Wyatt. This can perhaps be attributed to Guernsey's reputation as a safe and transparent jurisdiction in which to do business. She adds: "There has been some consolidation and an overall reduction in the number of traditional captive companies, but growth has been seen in the number of protected cells and incorporated cells established. Guernsey is well-placed to benefit from the increased appetite for cellular structures and as such there is unrivalled experience and expertise here in cell company structuring."
If Guernsey has to compete for business with domiciles that may be closer geographically to potential clients, it will have to rely on this and its other strengths that differentiate it. As Guernsey is outside of the EU, it is not directly subject to EU directives on taxation. The domicile was on the original Organisation for Economic Co-operation and Development 'white list' and has since been continually recognised as meeting international standards on tax transparency. To strengthen its reputation in this area, Guernsey has signed 57 agreements on tax information exchange with other countries. Another strength of Guernsey is what its financial services commission calls a "proportionate" regulatory regime.
The strength of these regulations will be galvanised in the coming year, in order to stay on top of global standards.
Jeremy Quick, the director of banking and insurance supervision at the GFSC, says: "The Guernsey Financial Services Commission has for some time, in alliance with the local insurance industry, been developing plans to meet new international requirements for risk-based supervision. Although not yet finalised, these plans will materialise in 2015." For solvency, several classes of insurers will be created, including one for captives – characterised as companies that self-insure risks. All categories of insurers will be obliged to apply prescribed and minimum capital requirements.
These calculations run off a spreadsheet supplied by the GFSC that, for instance, sets diversifications parameters. Apart from these quantitative requirements, captives already abide by a corporate governance code and follow the local version of an economic capital assessment. Quick continues: "It is intended that these requirements will be amended but not in a way that will have a material impact on captives. Also, no additional disclosure requirements are expected for captives."
"These regulatory developments will ensure that Guernsey continues to operate an up-to-date but still proportionate regulatory regime for captives."
It is perhaps this unwillingness to rest on its laurels that has allowed Guernsey to not only compete with, but be considered alongside, the biggest names in the industry.
An original version of this article was published by Captive Insurance Times, January 2015.
For more information about Guernsey's finance industry please visit www.guernseyfinance.com.
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