Richard Searle of BDO in Guernsey considers the development of the cell industry in Guernsey.
Captive Review (CR): How has the cell industry developed in Guernsey?
Richard Searle (RS): We have seen positive news in Guernsey around captives and reinsurance. That's coming through relatively new innovations, particularly around insurance linked securities (ILS).
There has also been a lot of recent success due to the Guernsey rated-reinsurance structures. This is encouraging to see after a period of relative anticipation with regards to the position of captives in the United Kingdom. People are starting to see the benefits of maintaining and creating captive structures.
Guernsey is a centre of expertise that provides a close proximity to an array of different service providers. On the cellular side, we are seeing a lot of growth. It has been a busy year for Guernsey in terms of cell structures. This is especially true of ILS contracts. This has involved the use of both PCCs and ICCs and is obviously related to the various motivations of the investment managers. Whether that be cost or the desire to have segregation of portfolios because of different investment pools, the flexibility this offers is an attractive prospect.
It is highly likely that amendments to the Guernsey company law approved at the end of July and effective in September 2015 will amplify this trend, as PCCs become more flexible for clients. This will include greater flexibility in terms of the conversion of protected cells into a non-cellular company. For example, the law will permit someone wanting to set up a captive as a cell part of an established PCC subsequently converting that cell into a stand-alone company in its own right as scale and requirements grow. The law will also allow greater flexibility in choice of accounts requirements between individual PCC cells and the company as a whole, creating more appropriate options to meet clients' specific needs.
CR: What emerging trends are you seeing for cells?
RS: We have seen overall growth in the number of formations. This is evident in terms of new cells, transactions within cells and new captives.
We audit more ILS structures than anyone in Guernsey, and that
is where we are seeing a lot of activity. This has involved
different investors and funds looking into alternative asset
classes where they can diversify their risk into areas of
investment that are not necessarily correlated with what you might
consider traditional market risk. These investments tend to be
fully collateralised, involve fairly big numbers and they offer an
extra level of diversity away from concentrated portfolios. There
is a great variety in this area, with areas as unusual as sports
risk and other types of risk that are not purely catastrophe type
In terms of what trends have emerged as a result of activity in
the wider market, there has been an increase in enquiries for
migration as a result of the implementation of Solvency II. We have
had enquiries for a transfer of a captive from another jurisdiction
where Solvency II will be implemented in full, because it is not a
requirement here. So this is a new opportunity for Guernsey that
has arisen because of the industry's work with the regulator,
and the decision not to adopt the policy for captives. This was a
decision made on an appropriate basis for the type of business that
we run in Guernsey.
CR: How is BDO developing its offering in reaction to these trends?
RS: We have a long and established focus on the captive industry and it is an important part of our business. We are having to address the increasing complexity in terms of the nature of structures and risk being covered.
To do this we have internally created a specific 'centre of excellence' for our approach to captives, with particular focus on ILS. This has been primarily driven out of Guernsey because it is where much of such business is based, but we are also working very closely with our financial services team in London as well. So in this way we have developed a breadth of expertise.
We are also talking with service providers around the longevity risk transfer piece, which is another relatively new angle that is being picked up in Guernsey. So in this case, we are working closely with our head of insurance in London to ensure we have the appropriate skill sets to meet these challenges.
The new UK GAAP and the accounting regulation that has come with it have prompted us to work closely with our clients to help them through the ramifications of these changes. We have actually had one client switch from UK GAP to IFRS ahead of those changes, due to a consideration from their parent group. So it is interesting to see how different clients are approaching these regulatory changes; some from a cost perspective and some from a suitability standpoint. As the fifth largest accounting firm in the world, we are very well placed to advise clients on those technical changes that have come through.
CR: Do you think any of the newly implemented or upcoming regulatory changes will have an impact on the number of cell formations?
RS: This is a difficult one to predict in terms of impact on specific numbers. Clients should and generally do select the most appropriate structure for their specific commercial requirements. Recent regulatory changes, including both the Company Law amendments mentioned previously as well as changes to the solvency regime, will create more options with greater and proportionate flexibility for clients. Consequently, I would expect that this will help to attract new business to the island, reinforcing Guernsey's reputation as the leading Captive Insurance domicile in Europe.
An original version of this excerpt appeared as part of a broader article which was published in Captive Review's 2015 Cell Company Guide, August 2015.
For more information about Guernsey's finance industry please visit www.guernseyfinance.com.
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