Guernsey: Punching Above our Weight?

Last Updated: 12 January 2011
Article by Diane Colton

Most Read Contributor in Guernsey, November 2017

Originally published in Captive Review, Guernsey Special Report, 2011

Guernsey has a regulatory framework that operates to international standards, says Diane Colton, Director of Insurance at the Guernsey Financial Services Commission (GFSC).

Good business seeks out well-regulated jurisdictions.

Guernsey has built its reputation on being well regulated and professional, while at the same time being innovative and adaptable. The introduction of the protected cell company concept in 1997 and incorporated cell companies in 2006 reflect this approach.

Guernsey is the largest captive jurisdiction in Europe and the fourth largest worldwide with approximately 685 international insurance entities, of which 345 are insurance companies and 340 are cells.

The total gross premium income in 2009 was £3.4bn (2008: £3.3bn) while total assets at 31 December 2009 amounted to £23.4bn (2008: £21.0bn) an increase of 11% over the previous year.

Guernsey is committed to keeping its laws and regulations up-to-date and relevant to the evolving insurance market and international requirements.

The GFSC approach to insurance regulation is robust yet flexible, informed and pragmatic, with a regulatory framework that operates to international standards and follows the Insurance Core Principles (ICPs) and Standards developed by the International Association of Insurance Supervisors (IAIS).

The GFSC has a statutory duty to protect Guernsey's reputation as a financial centre, and this is reflected in the approach to supervision.

The GFSC has used a risk-based approach to supervision for many years. A risk rating is assigned to each licensee, based on a set of standard criteria. This approach enables us to focus our resources on the areas of greatest risk and to identify where enhanced supervision may be required.

Although the results of the recent 2010 International Monetary Fund (IMF) assessment of Guernsey are yet to be released, the 2003 IMF assessment concluded that Guernsey has a 'high level of compliance' with international standards. From an insurance perspective, the IMF assessment is against the 28 ICPs developed by the IAIS. The ICPs apply to insurance supervision in all IAIS member jurisdictions, regardless of the level of development or sophistication of the insurance markets.

It is recognised that supervisory measures should be appropriate to the supervisory objectives and should not go beyond what is necessary to achieve those objectives.

The GFSC plays a very active role in the work of the IAIS and is represented on the Technical and Implementation Committees. I chaired the IAIS Captive Guidance Paper drafting group during 2007 and 2008 which prepared a guidance paper on the supervision of captives, which was adopted by the IAIS in October 2008. The GFSC also chairs the Market Conduct subcommittee and the Insurance Fraud working group, and we are members of a number of IAIS subcommittees including: Reinsurance, Solvency, and Governance & Compliance.

I believe that it is not only necessary for Guernsey to comply with international insurance standards, but also imperative that we are involved in active participation in the work of the IAIS in order to monitor and influence the development of these principles, standards and guidance.

A review of strategy and structure

The financial crisis and the evolving nature of the insurance sector have prompted the IAIS to review its strategy and structure. The current 28 ICPs are all being reviewed to ensure that there is a clear link between ICPs, standards and guidance. This process is scheduled to be completed by the end of 2011.

The IAIS has also established a taskforce for the development of a Common Framework for the Supervision of Internationally Active Insurance Groups (ComFrame) on which I am the Guernsey representative. The aim of ComFrame is to provide insurance supervisors with a common language and structure to better assess and supervise internationally active insurance groups, while insurers will benefit from improved supervisory efficiency and supervisory consistency. ComFrame is an important project that will increase the level of international regulatory and supervisory convergence and reduce regulatory arbitrage.

Introducing and implementing an internationally coherent, well-aligned and efficient approach to supervising groups is now a key issue for supervisors around the world. There is considerable scope for enhancing how groups are globally supervised and how groups manage their risks, many of which were magnified during the recent financial crisis. Supervisors also need better approaches to understand how groups actually organise themselves and operate. A better structured approach to increase cooperation and information sharing between home and host supervisors is crucial to achieving an overall, total understanding of an insurance group.

Guernsey is in the process of introducing a finance industry wide Corporate Governance Code, but since the introduction of the Licensed Insurers Corporate Governance Code in 2002 all insurers have had to document and evidence compliance with good corporate governance in line with international best practice. As a result, insurers falling under and complying with the Licensed Insurers Corporate Governance Code will be deemed to comply with the new industry wide Corporate Governance Code.

A need for bespoke

With the potential impact of Solvency II and Solvency II Equivalence on everyone's current agenda, risk-based solvency assessment is at the forefront of many discussions in Guernsey. The current Guernsey minimum capital requirement is based on a European regime that has not changed fundamentally since its introduction in the early 1970s. Minimum capital is calculated as the higher of a fixed percentage of premium income, or a fixed percentage of claim reserves.

This has the advantage of simplicity of calculation but, as in many other jurisdictions, does not relate the required capital to the specific risks of the insurer. The need for bespoke risk-based solvency assessments on an individual insurer basis has become apparent internationally.

In 2008, Guernsey introduced an additional requirement for all insurance companies to calculate an Own Solvency Capital Assessment (OSCA). This required boards of insurers to determine their own capital requirements, taking into account the identified risks. The GFSC issued guidance concerning the types of risk that should be considered, but did not specify a specific methodology that should be used.

The OSCA requirement is a first step towards the adoption of a full risk-based solvency capital requirement, and has been well received by the Guernsey insurance industry as it has encouraged boards to consider the specific risks that apply to their companies whilst retaining a flexible approach. The adoption of a more comprehensive risk-based solvency capital requirement is currently under consideration, and will be subject to consultation with the Guernsey insurance industry and other interested parties.

A key issue is the appropriate treatment of captive insurers. As regulators, our role includes keeping pace with international developments and maintaining Guernsey's reputation as an international insurance centre. In order to achieve this, we have to ensure that Guernsey has a regulatory framework that operates to international standards. We continually strive to ensure that Guernsey is in a position to influence developments in international insurance standards, and then to apply them on an informed basis to our insurance sector.

Diane Colton joined the GFSC in 1995. She was appointed to deputy director of insurance in 2001, and was promoted to director of insurance in January 2007. Diane is also a fellow of the Chartered Insurance Institute.

For more information about Guernsey's finance industry please visit

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.

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