Originally published in Captive Review, Latin America Report 2011
Within the current literature focusing on the Latin American insurance market there appears to be two words that commonly recur; 'underdeveloped' and 'potential.' The former reflects the fact that premium volume for life and non-life insurance is just a few percent of regional Gross Domestic Product (GDP). This, in turn, represents an even smaller proportion of total insurance business worldwide. Moreover, much of this business is concentrated in just a few countries such as Argentina, Brazil, Chile, Colombia, Mexico and Venezuela.
Yet, the evidence also shows that not only is there room for more insurance market penetration (premiums as a percent of GDP) but also for greater 'density' (premium per capita in US$). In addition, average economic growth of around 4% is twice that of the US and four times greater than in Europe.
Turning specifically to captive insurance, Latin America is also a less mature market. Gabriel Holschneider Osuna, Director of Rainmaker, the Mexico-based risk management consultancy is quoted within Captive Review's Latin America report for 2010 as saying: 'Latin America is where the US and Europe were 20 years ago in terms of captive insurers.'
The article notes that there are still regulatory restrictions to doing business and an aversion to advanced alternative risk transfer methods but 'as Latin America's economies grow and become more international in outlook, companies' risk management methods will become more sophisticated and their adoption of captive solutions will increase.'
So, in summary, we can see that the growth of the Latin American economies means that the continent is going to see increasing numbers of companies with more substantial and diverse risks to be covered and the limited options available through the localised insurance markets may mean that they seek alternatives, such as captives, from jurisdictions further afield.
Certainly, the Asociacion Lationamericana de Administradores de Riesgos y Seguros (ALARYS) has already established ties with Bermuda, the world's foremost jurisdiction for insurance, reinsurance and captives. It also has the distinct advantage of being over on the same side of the 'the pond' and thereby attractive from a time zone perspective. However, if Latin American firms are looking for a European alternative, then Guernsey – the continent's leading captive insurance domicile – has much to offer.
The right environment
Guernsey is a British Crown Dependency. It is legislatively and fiscally independent of the UK and has its own democratically elected parliament. This delivers political and economic stability on which business can rely and means the Island can and does respond quickly to the needs of commerce.
The Island has a special relationship with the European Union, it enjoys access to EEC countries of physical exports without tariff barriers, but other EU directives, including insurance/reinsurance measures, do not apply unless voluntarily accepted.
Conducting business in Guernsey is also made easy because the Island is English speaking; uses the British pound (Sterling); is in the same time zone as the UK, allowing interaction with both the Americas and the Far East during a single working day; is situated in an area with a temperate climate (and no exposure to natural disasters); and is located close to and with good air links to both the UK and continental Europe, including London and Zurich/Geneva.
World class finance centre
These characteristics have helped Guernsey establish and maintain a broad-based finance centre that comprises:
- Banking – 40 licensed banks holding deposits of $187bn
- Insurance – the leading European captive insurance domicile and number four globally
- Funds – net assets under administration and management of $391bn (up 34% year on year)
- Investment management and stockbroking – gross assets under management of $113bn
- Fiduciary – 150 licensed providers with more than $483bn in trust and company structures
- The Guernsey Financial Services Commission (GFSC) – an independent Regulator renowned for its robust yet pragmatic approach
- The independent, Channel Islands Stock Exchange (CISX) – based in Guernsey, the exchange is recognised in both London and New York and offers a cost-effective platform for listings, of which there are now more than 3,500.
- Supporting professional services of lawyers, accountants, auditors, tax advisers and actuaries
The development and enhancement of this infrastructure and expertise during the last five decades means that Guernsey is regarded as a leading international finance centre. Indeed, The Banker magazine (September 2010), ranked the Island among the top four specialised finance centres globally. A significant contributory factor behind this assessment was the strength of the Island's captive insurance market.
Captive insurance expertise
Guernsey has an international insurance industry with a reputation for innovation and professionalism in providing a range of risk management solutions. In particular, the Island is renowned for its experience and expertise in captive insurance.
Captives have been incorporated in Guernsey since 1922 and today approximately 40% of the leading 100 companies on the London Stock Exchange with captives have them domiciled in the Island.
Guernsey plays host to subsidiaries of global names such as Aon, JLT, Marsh and Willis, all of whom already have a presence in Latin America, as well as independent, boutique operators such as Heritage Insurance Management and Alternative Risk Management (ARM), providing a holistic environment for insurance solutions.
Guernsey continues to see growth despite the maturity of its captive sector and the prevailing soft market conditions. The number of insurance licenses issued in Guernsey last year was slightly up compared to during 2009. There were 47 new insurance licenses issued in 2010, comprising 12 international insurers (pure captives, PCCs, ICCs and ICC cells) and 35 PCC cells. This took the number of international insurers to 341 and total international insurance entities to 675 at the end of 2010.
Additionally, the Island's international insurance sector has seen the value of business increase markedly over the last few years. In 2003 the industry had gross assets of £13bn, a net worth of £5.3bn and premiums of £2.5bn. Now there are gross assets of £23.4bn, a net worth of £8.1bn and premium written of £3.4bn.
Nearly 60% of the international insurers licensed in Guernsey have their parent company located in the UK however the Island's insurance sector is truly international. Firms from across Europe, the USA, South Africa, Australia, Asia, the Middle East and the Caribbean have established captives in the Island.
A notable development last year saw Heritage Insurance Management in Guernsey achieve a worldwide first by amalgamating two Protected Cell Companies (PCCs) into one. The Island pioneered the cell company concept when it introduced PCC legislation in 1997 and since introduced the innovative Incorporated Cell Company (ICC).
International standards of regulation
The GFSC has been commended by the International Monetary Fund (IMF) for its standards of regulation, including high level of compliance with the 28 Insurance Core Principles of the International Association of Insurance Supervisors (IAIS). Indeed, the GFSC has been of seminal influence in the formation and development of that organisation and has become a signatory to the Multilateral Memorandum of Understanding (MMoU) with the IAIS.
Guernsey has no plans to seek equivalence under Solvency II but the Island is still committed to meeting the international regulatory standards set by the IAIS and endorsed by the G20. We believe that the position the Island has adopted will enhance Guernsey's attractiveness as a domicile to captive owners and other niche insurers looking for a regulatory environment that is proportionate to their business models.
Guernsey is seeing increased diversification in the geographical source of our business across the financial services sectors and practitioners from our insurance sector believe there may be opportunities for them in Latin America.
We are aware that there are some potential impediments to doing business. However, an extremely positive development is that our authorities have begun negotiations regarding Tax Information Exchange Agreements (TIEAs) with both Chile and Venezuela and we expect to sign agreements with Brazil, Argentina, and Mexico during the first half of this year. We believe there may also be potential for further agreements such as Double Tax Treaties (DTTs) to follow and certainly this is something our representatives will be pursuing.
It is worth emphasising that our cooperative approach to entering into such agreements meant that Guernsey was within the first wave of territories placed on the OECD/G20 'white list' and since then, our continued commitment to tax transparency and exchange of information has been endorsed by the OECD Global Forum.
Now you can see why Guernsey is the European captive offering for Latin America.
For more information about Guernsey's finance industry please visit www.guernseyfinance.com.
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.