Dominic Wheatley, Chief Executive of Guernsey Finance, explores how producer owned (re)insurance companies from Guernsey offer a new revenue stream for brokers.
I am sure that brokers, like the rest of us, are eager to tap into any possible additional flows of income. Those that are, will be very 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. However, the use of a producer or broker owned insurance or reinsurance vehicle can allow brokers to participate in the underwriting profits usually retained solely by the insurer.
Producer owned (re)insurance companies
A broker, as a producer of business, can sponsor and establish their 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.
Either of these options offers 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
- Provide a hedge against hardening market rates and reduced commissions
- Pricing and cover flexibility
- Access to reinsurance markets
- Enables the broker to provide an enhanced service to their clients which generates even more value from existing profitable business
These can be established through the use of Protected Cell Companies (PCCs) or Incorporated Cell Companies (ICCs), which provide the optimal structure to insure or reinsure the risks of several different clients by underwriting their respective exposures into separate cells. PCCs and ICCs are easy to setup and there is flexibility in being able to add cells, which are also particularly cost effective.
So, where can brokers access this offering?
The Guernsey difference
Brokers need look no further than Guernsey where there is an experienced, innovative and professional risk management sector specialising in captive insurance, reinsurance and Insurance Linked Securities (ILS), part of a broad based and internationally focused insurance industry.
The Island is home to the major 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 number four globally. This strength is underlined by the fact that approximately 40% of the leading 100 companies on the London Stock Exchange with captives have them domiciled in Guernsey.
Indeed, a significant majority of the international insurers licensed in Guernsey have their parent company located in the UK. However, the Island's insurance sector is truly international. Firms from across Europe, the US, South Africa, Australia, Asia, the Middle East and the Caribbean have all established captives in the Island.
A major draw is the fact that Guernsey pioneered the cell company concept back 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 Limited was established in Guernsey as the first PCC in the world and has since been used by more than 50 corporations as a cell captive facility; and Guernsey-based Heritage Insurance Management also achieved a worldwide first in 2010 by amalgamating two PCCs – with 17 cells between them – into one.
A new revenue stream
Guernsey offers an ideal environment for brokers establishing a producer owned (re)insurance company. Compared to 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 some of the risk management providers in Guernsey.
An original version of this article was first published by The Broker, May 2015.
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.