Originally published in Captive Review, Guernsey Special Report, 2011
As Guernsey continues its position as the leading European captive domicile, it prepares for change and the opportunities it could bring reports Matthew Broomfield of Captive Review.
Guernsey continues its position as the leading captive domicile in Europe and number four in the world. Approximately 40% of the leading 100 companies on the London stock exchange with a captive have it in Guernsey. In the first three quarters of 2010, 34 new captives were licensed (including cells) and 27 licences surrendered, giving a net gain of 7 licensees and bringing the total of captives and cells under management to 685.
"Guernsey's captive industry has continued to grow despite the ongoing economic downturn," says Nick Hayes, managing director of Heritage Insurance Management.
"So far this year we have seen a significant uplift in new business enquires compared with the preceding two years."
However, Guernsey still faces some challenges, particularly on uncertainty around Solvency II equivalence, its relationship with EU domiciles, and possible changes to its tax regime. Mike Poulding, deputy director of Guernsey Financial Services Commission's International Insurance Division, believes the odds of Guernsey becoming Solvency II equivalent is an 'even bet'.
However, an especial source of uncertainty, says Poulding, is that it's presently unclear whether equivalence would affect a jurisdiction's entire (re)insurance market. "One paper mentioned the possibility of a domicile being equivalent for only part of its sector. But that was only a suggestion and we've had nothing coming out of the EU since saying if that would be acceptable or not."
Poulding says he would favour a two-tier approach that differentiated commercial (re)insurers and captives, especially on the issue of capitalisation levels. "Solvency II's EU measurement is calibrated at 99.5% (1 in 200) over one year, which is appropriately strong for some commercial insurers, particularly if they're writing coverages for the public, but for most captives it's too high because often only the parent is taking the risk."
Poulding would like Guernsey to follow the same risk-based methodology as Solvency II, but with capitalisation requirements of around 1 in 20 rather than 1 in 200. For now, Poulding says Guernsey will 'wait and see' what happens in November when the first group of domiciles, including Bermuda, Switzerland and Australia are assessed for regulatory equivalence with Solvency II by the Committee of European Insurance and Occupational Pensions Supervisors (CEIOPS).
"A good outcome for Guernsey would be if Bermuda was accepted as equivalent just for reinsurers and not captives."
However, Martin Le Pelley, treasurer of The Guernsey International Insurance Association (GIIA) and compliance officer at Heritage Insurance Management, considers the state of flux a positive force for Guernsey's captive market.
"We're going through a period of unprecendented change in the (re)insurance market. Where there's change there's always uncertainty but there's opportunity as well."
Le Pelley thinks there's little chance of Solvency II equivalence being adopted by or affecting Guernsey. "The Crown Dependencies don't have a major commercial (re)insurance market, so logically they shouldn't have to apply Solvency II at all. And even if some of them decided to apply a level of equivalence, it would only apply to the commercial reinsurers so the captives should be shielded anyway."
In fact, Le Pelley thinks Solvency II could cause captive migration from the EU into Guernsey, as parent companies seek to retain their captive's present capitalisation levels. "If the Solvency II formula remains as it is, EU captives would have to recapitalise. But parent companies won't necessarily want to do that and, taking a commercial view, might decide they want to continue with their present capitalisation levels. If they can't do that in the EU and they don't need the EU's freedom of services legislation, because it's a reinsurance captive or because it's writing first party risks only, then migrating their captive to outside the EU will often seem the best solution. The migration legislation between Guernsey and most EU domiciles would make this quite easy and cost efficient."
Le Pelley thinks a larger challenge for Guernsey could be the EU's review of the Isle of Man and Jersey's tax regimes, and potentially also Guernsey's, to see whether they are consistent with what the EU considers unfair. Though the review is focused only on the Isle of Man and Jersey at present, Le Pelley thinks this could mean that the EU will take its findings as representative of the Crown Dependencies as a whole.
If this occurred, Guernsey's tax rates could be judged unfair (unfairly in Le Pelley's opinion) because of its '0/10' corporate tax regime, introduced on 1 January 2008, by which most companies pay 0% tax but some that are regulated by the Financial Services Commission, such as banks and utilities companies, pay 10% tax, making it a two-tier tax rate.
"It's slightly ridiculous because there are similar examples even within the EU, such as Malta. Malta has a headline corporate tax rate of 35%, but if you are the non-Maltese shareholder of a holding company that owns a Maltese insurance company you can apply for and get a 30% tax rebate via the holding company. That only applies if you're not a Maltese resident. So effectively, even in the EU there are jurisdictions applying a two or three tier regime."
Le Pelley thinks Guernsey would not be unduly affected by the proposed tax rule changes because, if they do occur, it would be able to employ a territorial tax system, whereby as long as the risks were based outside the jurisdiction, tax rates would continue at 0% for captives.
However, Le Pelley says the rules call into question what the EU is doing in terms of interpreting and enforcing its powers outside the EU. "Frankly it should be applying its powers inside the EU.
"Because we're a small and niche player, we're open to challenge and criticism from political heavyweights who perceive Guernsey as more nimble, flexible and opportunistic than they can be. But we're always going to be faced with that challenge and we'll always be able to deal with it."
For more information about Guernsey's finance industry please visit www.guernseyfinance.com.
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