Originally published in Captive Review, Guernsey Special Report, 2011
Dominic Wheatley, chairman of the Guernsey International Insurance Association (GIIA) is certain that the Guernsey captive industry is well equipped to deal with anything that is thrown at it in this uncertain economic climate.
As the cool wind blows in from the sea to shake down the autumn leaves, it signals that the time has come again for the Captive Review Guernsey Special Report. Sitting here in St Peter Port, the harbour offers a tranquil view in the late afternoon sun. This tranquillity is in stark contrast to the pace of change (and corresponding levels of activity) for Guernsey captives and those involved in their management and regulatory super-vision. It has certainly been another satisfactory year for Guernsey's international insurance industry.
Two years ago, Peter Niven of Guernsey Finance wrote in this report of how Guernsey is always focused on enhancing its offering to meet the evolving needs of the market, and that remains as important now as it was then. Indeed, it is the enduring feature of Guernsey as an insurance jurisdiction and a finance centre generally.
This year has seen changes in our disclosure rules and a review of our corporate governance, as well as continuing to keep a weather eye on the development of Solvency II in Europe.
All of which guarantees that the island will continue to offer all that is best in an independent environment – an innovative and effective industry, backed up by a regulatory environment that is both accessible and flexible while meeting acceptable international norms.
On this latter point, during 2010 Guernsey's finance sector has been subject to review by the International Monetary Fund. Their final report is not yet out, but all involved are confident of another clean bill of health confirming Guernsey's status among the best financial jurisdictions in the world.
Guernsey's lasting appeal
In statistical terms, the island continues to attract new business with 34 new licences issued already in 2010, and we comfortably remain Europe's leading captive domicile with over 700 insurance licences in issue. In a period of soft insurance markets and low (or no!) economic growth, this is a tribute to Guernsey's enduring attraction and the resilience of the industry.
Now included among Guernsey's licensed insurers are a significant number of Incorporated Cell Companies and Incorporated Cells – further reinforcing our reputation as leading innovators of captive corporate structures.
So what of the future? Well, more of the same is the safe prediction. The key issues facing the island are the review of Guernsey's corporate tax regime and our response to Solvency II: both are getting a great deal of careful attention. The Guernsey International Insurance Association (GIIA) is at the heart of these debates to ensure that we deliver the best response for Guernsey captives and Guernsey captive owners.
The corporation tax review is at an early stage, with all options still on the table. The GIIA team is focused on maintaining a neutral environment, where Guernsey captive owners do not incur additional tax liabilities because of their captive operations. Solvency II is offering challenges to captives everywhere. In the EU, organisations such as the European Captive Insurance and Reinsurance Owners Association (ECIROA) are lobbying hard for the EU to adopt a proportional application of Solvency II to captives.
Their efforts, while not totally in vain, have had mixed success to date, and many captives are looking carefully at how they need to adjust their business plans to meet the Solvency II challenge. For Guernsey as a third country (one outside the EU) this debate is also relevant, and GIIA has made submission to the EU authorities in relation to its proportionality proposals. Although these will not directly apply to Guernsey captives, they will be influential on international standards and will be critical to any domicile looking to achieve formal equivalence recognition from the EU.
The issue of equivalence will be on the mind of all independent jurisdictions and poses a dilemma. However, the criteria of equivalence remain as uncertain as the proportional application of Solvency II to captives, and the compounding of these two uncertainties makes it impossible to understand what equivalence might mean, let alone whether it would be beneficial to Guernsey captives.
Two years ago, my predecessor in this report questioned the effect of Solvency II on the price and availability of fronting to captives in non-equivalent jurisdictions. To date, indications from commercial fronting insurers are that this effect will be minimal, but this is also still uncertain and GIIA will continue to liaise closely with them to ensure continuing market access into the EU for Guernsey captives.
As always Guernsey is staying close to this issue and is liaising regularly with the EU, ECIROA, AIRMIC and others to both follow and influence the debate. This involvement and understanding will enable us to be sure that our position will continue to be what is best for Guernsey captives and captive owners.
2011 will see the next stage in the evolution of international insurance regulatory standards, with the culmination of the latest review by the International Association of Insurance Supervisors (IAIS) of its own core principles that form the benchmark against which the IMF conducts its assessments.
As always, the Guernsey Financial Services Commission (GFSC) has been at the heart of the IAIS's deliberations, fighting to ensure that these continue to enable the flexibility required by independent jurisdictions offering appropriate regimes for their industries and resisting the adoption of prescriptive guidance based on the needs of mainstream jurisdictions and large-scale commercial insurance.
Proof of the pudding
Anyone who doubts the effectiveness of appropriate regulation in specialist domiciles is invited to compare Guernsey's record on insurer failures with that of any mainstream jurisdiction they choose. The proof of the pudding is always in the eating.
Two years ago Guernsey introduced its Own Solvency Capital Assessment process known as OSCA. Many captive directors have found this process has significantly enhanced their understanding of the risks faced by the captive, and has informed better decision-making as a result. This move
to risk-based solvency predated mainstream jurisdictions' progress in the area, and did so in a way that was flexible enough to accommodate the diverse business models and scales of operation of Guernsey captives. Again Guernsey has set the standard for independent jurisdictions on how to respond to a key international regulatory driver, while maintaining the essential appropriateness of regulation to the business being supervised.
Speaking of appropriate regulation, the GFSC has moved house recently into great new offices on the sea front. They have also re-branded and rela nched their website.
While on the subject of rebranding and new websites, GIIA has also renamed and re-branded and relaunched its website. The sharper eyed among you may have noticed that the old Guernsey Insurance Company Management Association has been renamed the Guernsey International Insurance Association. This reflects our evolution and the broader spectrum of members that we now represent.
Reverting to our theme of responding positively to change, we ought to mention the coming challenges of tax signoff of captive reserves, changes in IFRS rules on the accounting of insurance contracts, not to mention the constant changes in the business environments of captive owners that need a positive response from their captives to maintain and enhance the value they deliver.
Of course, there will also be new opportunities for Guernsey captives. New captive programmes are emerging that address gaps in the commercial market, as well as new risk-diversifying captive programmes in areas such as employee benefits, and new ways of increasing capital and operational efficiency.
Guernsey will continue to lead the world in developing and enhancing captive value.
All in all, I can do no better than to refer back to my predecessor and remind you of his closing comment from this publication two years ago: as the proactive and innovative nature of the
Guernsey captive industry has proved, the challenge of an uncertain future can be met with relish. And we will continue to do just that.
See you next time, or as we say in Guernsey: Ŕ la perchoine!
Dominic Wheatley is chairman of the Guernsey International Insurance Association (GIIA). He is also the chief marketing officer of the Willis International Captive Practice and managing director of Willis' Guernsey captive management operation.
For more information about Guernsey's finance industry please visit www.guernseyfinance.com.
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