Originally published in Captive Insurance Times, October 2012
Fiona Le Poidevin, Chief Executive of Guernsey Finance, and Richard Paris-Smith, Director, Willis Management Guernsey, explores how Guernsey is differentiating itself from other offshore domiciles.
While the island of Guernsey sits closer to the coast of Normandy than the coast of the England, it is politically deemed to be a British Crown dependency. This means that the island governs itself, but should it ever be threatened, the UK would have to defend its shores. This is where its dependency ends. Guernsey is capable of making its own decisions, particularly business ones, and the island has made its own journey into captive insurance. As a domicile, Guernsey decided against seeking Solvency II equivalence, which is something that old-captive hand Bermuda, as well as Japan and Switzerland, did not do, and it pioneered the use of protected cell companies (PCCs) as alternative risk transfer models in the late 20th century. Guernsey decides what is best for its captive insurance industry, and the results of this approach have been impressive.
CIT talks to two industry experts to get their views on the state of the captive insurance market in Guernsey. Fiona Le Poidevin, who is the chief executive of Guernsey Finance, provides her take on the island, alongside Richard Paris-Smith, director at Willis Management Guernsey.
How has Guernsey developed as a captive insurance domicile?
Fiona Le Poidevin: The first captive in Guernsey was set up in 1922, which goes some way to explaining why the island has built up a vast amount of experience in this sector over the years. In the present day, independent data shows that the island is the largest captive insurance domicile in Europe and the fourth biggest globally, with 739 international insurance entities (as of 31 May 2012). Additionally, of the top 100 companies on the London Stock Exchange with captives, around 40 percent of those captives are domiciled in Guernsey, along with 95 of the captives belonging to the Global 1500.
The island's captive insurance sector has traditionally dealt with larger companies from the UK, but we are now seeing new business come from much further afield with firms from across Europe, the US, South Africa, Australia, Asia, the Middle East and the Caribbean having established captives on the island. Guernsey has also become a more accessible and favoured destination of SMEs, which can participate in third-party captive offers and receive all of the traditional advantages of a captive but share the costs.
Richard Paris-Smith: From the early 1980s, Guernsey has been a recognised leader in captive business. The 1986 Insurance Act provided the foundation for Guernsey's offering, which is complemented by sympathetic regulation, accessible regulators and experienced practitioners. In addition, a solid and vibrant captive infrastructure has been created through investment by both the public and private sector, while continual enhancement and development of innovative new products such as PCCs has enabled Guernsey to remain at the cutting edge of captive development and to be recognised as a market leader in Europe. One major contributor to its success has been the adoption of risk based solvency from the outset of captive development; it is ironic that 25 years later the EU is still struggling to implement its own risk based regime—Solvency II.
What is the island doing to stay innovative and ahead of its competition for captive business?
Le Poidevin: Guernsey has a history of innovation in the finance sector. Indeed, the island pioneered the use of cell companies back in 1997 when it introduced the PCC for use in our captive insurance sector. The concept is now used across the financial services world as an alternative application for the structuring of many different types of products. More recently, the island has used its experience and expertise in establishing some cell captive firsts, such as Guernsey-based Heritage Insurance Management amalgamating two PCCs—with 17 cells between them—into one. The island was also a key part in the launch of the UK Government-backed mortgage indemnity scheme, which was introduced by the UK's Home Builders Federation (HBF) and the Council of Mortgage Lenders and sees mortgage risk for lenders on new build homes underwritten by house builders and the government. By insuring the risk of default losses, the NewBuy scheme allows lenders to offer 95 percent loan-to-value mortgages on new homes. JLT Insurance Management Guernsey is running the unique captive insurance company that was established for HBF and already has more than 40 cell structures in place, with more submitted and waiting to come on board shortly.
Our captive insurance sector is also playing an important role in the island's growing position as a cleantech hub. Not only does Guernsey specialise in assisting with finance structuring via investment funds, but it also offers its full suite of banking services, private wealth services, intellectual property services, and of course, its world-leading expertise in captive insurance.
Paris-Smith: Guernsey's keen awareness of the changing needs of captive owners and the influence of industry trends, plus a commitment to high quality service and the encouragement of innovative thinking, have all helped to create the right environment for staying ahead in the captive industry. The local captive industry retains its entrepreneurial spirit but applies it to international best practice. The open partnership that exists between regulator, politicians and the captive practitioners ensures that the island is constantly refining its offering within the boundaries
of international regulatory standards. Multi-stakeholder working groups—comprised of representatives across the industry—ensure Guernsey responds to the new global regulatory environment while ensuring the highest level of customer care and attention.
The proof of this recipe is in the statistics. Guernsey has had strong growth at a time when many other major domiciles are seeing retrenchment. New incorporations and captives migrating from other jurisdictions have fuelled this growth.
What are the effects of Guernsey's geographical proximity to Europe?
Le Poidevin: Our close proximity to the UK and Europe means that both have historically been key markets for the island, while our relative size means that it is possible for clients to hold meetings with all of their service providers in one day. Travelling to the island is also quick and easy as there are frequent air and sea links to both mainland Europe and the UK, with a flight time from London of less than an hour. For those looking to do business in Europe, Guernsey offers the advantages of being situated in Europe geographically without all the implications of operating in a jurisdiction that is a full member of the EU. European directives such as those on fiscal harmonisation, financial services and company law do not have effect in Guernsey. The island's commitment to continuing to meet the standards of the International Association of Insurance Supervisors and its proportionality principles, rather than seeking Solvency II equivalence, means that we have provided current and potential clients with certainty going forward and a more attractive environment for captive owners and other niche insurers in Europe.
Paris-Smith: Guernsey has the benefits of being located within the European region, but without the constraints of EU regulation. Being close to all major European markets, and with similar time zones and a legal system that is based on UK law, makes Guernsey a good proposition for European captive owners. For many, using a local insurer to front business to the Guernsey captive is the optimal solution, as local regulatory issues can be outsourced and the captive allowed to concentrate on the underwriting business. Being just a 40-minute flight to London, the major source of market capacity, makes Guernsey a highly attractive and convenient location.
What is the service provider situation like in Guernsey?
Le Poidevin: Because of the reputation that Guernsey has built up over many years as a captive insurance domicile, the island plays host to a range of insurance management companies, from subsidiaries of global names including Aon, Marsh, JLT and Willis, through to independent boutique operators such as Heritage and Alternative Risk Management, providing an holistic environment for insurance solutions. The island's insurance industry infrastructure is further complemented by the banking, investment and fiduciary sectors, and it is supported by a network of professional services, including legal, tax, accounting and actuarial advisers.
Paris-Smith: Guernsey has a full service offering across all aspects of support to the captive industry, and plays host to some of the most qualified, experienced and innovative captive managers in Europe.
Where are you seeing new line growth and why is this the case?
Paris-Smith: Captives offer a highly efficient risk-financing vehicle that can deliver lower risk transfer costs, better MI and enhanced risk management practices. We see captives being used to house and finance risks that the market is currently reluctant to support, including financial lines, cyber risks and financial contingency.
We are seeing increasing levels of interest in using the captive as a central platform for aggregating insurance programmes across territories and driving more informed reinsurance purchasing. Employee benefits are also attracting a lot of attention in the captive space due to the standardisation of cover globally and the opportunity to gain meaningful cost savings by adopting a retention strategy.
Why has Guernsey decided against seeking Solvency II equivalence?
Le Poidevin: There has been much uncertainty surrounding Solvency II's final form and we believe that as it is currently constructed it would burden insurers in Guernsey with additional costs and render currently effective captive business plans uneconomic. The announcement in January 2011 by the island's government and the
Guernsey Financial Services Commission that there were no plans to seek Solvency II equivalence gave current and potential clients certainty on the understanding that, unless there were significant amendments to the terms and conditions, then seeking equivalency was not in the best interests of the island's insurance industry.
Solvency II has been designed to address systemic and group risks within the commercial insurance markets, yet, these are risks that are not generally faced within Guernsey's insurance industry, which is predominately comprised of captive insurance companies. A captive is usually formed for a specific purpose, primarily self-insurance, and it is called a 'captive' because, in its purest form, it is set up by its owners to only insure the risks of its parent and/or fellow subsidiaries. The concept is reliant on the ability to be flexible and adaptable in order to ensure that risks are managed in the most cost-effective and capital efficient way for the parental group. Therefore, it is not suited to the Solvency II regime. It requires a more proportional regime such as the one that is available in Guernsey.
Paris-Smith: Seeking equivalency is not in the best interests of the island's insurance industry. There is still uncertainty surrounding the impact of Solvency II, more than a year and a half since the island's authorities stated their position. Guernsey's statement provided certainty to existing and potential business and is another example of how Guernsey was and is at the forefront of the industry. Guernsey remains committed to meeting internationally accepted regulatory standards while ensuring, through a robust process of consultation, that any changes take account of the nature of the island's industry, which is predominantly captive insurance.
For more information about Guernsey's finance industry please visit www.guernseyfinance.com.
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