Originally published in the Captive Review, Guernsey Special Report, January 2012
Fiona Le Poidevin, Deputy Chief Executive of Guernsey Finance, describes how Guernsey remains a dominant force among captive insurance domiciles and provides new figures to support her argument.
The global financial crisis initially came to a head in 2008, yet we continue to see the wave of repercussions in the eurozone and beyond.
These developments have created an uncertainty which emphasises the importance of effective risk management within companies. Guernsey has been well-placed to assist companies in this regard due to our reputation for providing an extremely competitive offering.
Our decision not to seek equivalence with Solvency II but retain our commitment to meeting international standards provides local industry and also current and potential clients with certainty and clarity regarding the regulation of insurance business in Guernsey.
This is being credited as one factor behind the surge of new insurance licences issued during 2011. The fact that there were 50% more licences issued last year compared to 2010 is new evidence that Guernsey remains a dominant force among captive insurance domiciles.
A leading captive insurance domicile
The insurance industry in Guernsey has its origins dating back to the 18th century, and the island's first captive insurance company was incorporated in 1922. Since then, Guernsey's insurance market has grown to the extent that research from both Business Insurance and Captive Review recognises the island as the largest captive domicile in Europe and number four globally.
Guernsey plays host to subsidiaries of global names such as Aon, JLT, Marsh and Willis, as well as independent, boutique operators such as Heritage Insurance Management and Alternative Risk Management (ARM), providing a holistic environment for insurance solutions. The island's insurance industry is complemented by banking, investment and fiduciary sectors and supported by a network of professional services, including legal, tax, accounting and actuarial advisers.
The strength of Guernsey's captive insurance sector is reflected by the fact that approximately 40% of the leading 100 companies on the London Stock Exchange with captives have them domiciled on the island.
Indeed, some 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 US, South Africa, Australia, Asia, the Middle East and the Caribbean have established captives on the island.
Guernsey pioneered the cell company concept when, in 1997, it introduced the Protected Cell Company (PCC). It has since also introduced the innovative Incorporated Cell Company (ICC). This experience means that Guernsey has built a range of financial services professionals with the highest level of expertise in utilising the structure.
In addition, the island has developed a regulatory infrastructure that enables them to be particularly widely employed. It is this environment that has led Captive Review to proclaim that Guernsey is the "undisputed king of the cell captive world".
Our innovation and expertise in this field is illustrated by the fact that:
- Aon's White Rock Insurance Company PCC Limited was established in Guernsey as the first PCC in the world. Since inception, it has been used by more than 50 corporations as a cell captive facility and grown to be the largest structure of its kind in the world
- White Rock Insurance (Guernsey) ICC Limited – also Aon owned – was the first ICC in the world to be insurance licensed
- Guernsey-based Heritage Insurance Management achieved a worldwide first in 2010 by amalgamating two PCCs – with 17 cells between them – into one
- In 2011, law firm Bedell Cristin, in Guernsey, advised Swiss ILS managers Solidum Partners AG on a groundbreaking CAT bond transfer, namely a private transformer of catastrophe risks into $12.4m of securities in three separate deals through a Guernsey based incorporated cell structure, Solidum Re.
Strategic Risk carried out a practitioner survey and published the results in a special supplement, which accompanied the September 2011 issue.
The results show more respondents have their captives in Guernsey than any other domicile; captive owners who use Guernsey recognise the island's expertise in the sector, its strong links to London and the pragmatic attitude of the GFSC; and Guernsey's decision not to currently seek equivalence with Solvency II has the backing of owners with captives in the island.
The research also shows that captive owners view tax as only one part of the overall decisionmaking process for establishing a captive. The "Zero-10" corporate tax regimes of the Crown Dependencies have come under scrutiny by the EU but it is already clear that Guernsey is committed to retaining a regime that is both compliant and competitive. Most importantly, the Guernsey government has already stated that tax neutrality for our captive insurance companies is in no way under threat.
The Strategic Risk research reveals that domicile reputation and the regulatory environment are also key considerations to location choice and therefore it is not surprising that Solvency II is potentially a key issue that could influence domiciliation or redomiciliation. This research shows captive owners using Guernsey are very much in support of our decision not to currently seek equivalence with Solvency II.
There is significant uncertainty around Europe and beyond regarding both the timing of introduction and also the implications in practice of Solvency II.
However, in Guernsey, we have opted for certainty. The island is not part of the EU so we are not required to adopt its Directives and our government and the GFSC have issued a joint statement to say that currently the island doesn't have any plans to seek equivalence under Solvency II. Solvency II has been designed to address systemic and group risks within commercial insurance markets, but these are risks not generally faced by Guernsey-based international insurance companies, where there are a large proportion of captive insurance companies. Therefore, as things stand, equivalence could potentially burden Guernsey insurers with additional costs and render currently effective captive business plans uneconomic.
Bermuda, Switzerland and Japan are adopting a different stance. These countries were in the first wave of equivalence applications, but were not doing so primarily for their captives, but to protect their international commercial reinsurance industries. Bermuda in particular is seeking to mitigate the effects on their captive insurance business. We continue to monitor these developments closely. Guernsey will continue to meet the standards of the International Association of Insurance Supervisors (IAIS) – the IMF has commended the island for having high levels of compliance with the 28 insurance core principles of the IAIS – but its proportionality principles mean that we will provide a more attractive environment for captive owners and other niche insurers.
New insurance business
Martin Le Pelley, chairman of the Guernsey International Insurance Association (GIIA), believes that Guernsey's decision not to currently seek equivalence under Solvency II has "no doubt" contributed to the surge in new insurance business during 2011.
Latest figures show that the GFSC licensed 72 international insurers during 2011, which is a 53% increase from the 47 approved during 2010. The growth is across the range of entities from conventional captive insurance companies, PCCs, ICCs and in particular, PCC and ICC cells.
Towards the end of 2011, there has been notable media interest in two particular new schemes linked to Guernsey. Broking firm Acumus has launched the Guernsey-based Igloo Insurance PCC Limited.
Three UK housing associations have joined the scheme by taking cells in the PCC to insure property risks while avoiding market volatility and a number of other associations are expected to join during 2012. It is managed by Heritage Insurance Management Limited.
The Jardine Lloyd Thompson Group (JLT) has announced that its Guernsey office will play a key role in a new mortgage indemnity insurance scheme being introduced in the UK. The Home Builders Federation (HBF) and the Council of Mortgage Lenders (CML) have created the scheme, which will see mortgages on new build homes underwritten by house builders and the UK government.
By insuring the risk of default losses, the scheme allows lenders to offer 95% loan to value (LTV) mortgages on new homes. Growth in 2011 has helped push the net number of international insurance entities licensed in Guernsey up by 12, from 675 at the end of 2010 to 687 at the close of the year.
The GFSC has also released data for 2010, which shows that the Guernsey international insurance industry had gross assets of £21.4bn, a net worth of £8.5bn and premiums written of £4.1bn.
This data from the GFSC, coupled with the independent evaluations, provides strong evidence that Guernsey remains a dominant force among captive insurance domiciles.
For more information about Guernsey's finance industry please visit www.guernseyfinance.com.
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