As cell companies continue to see an increase in interest, Fiona Le Poidevin of Guernsey Finance discusses the growth of Guernsey's dynamic cell sector.
Guernsey has been long regarded as a pioneer in the use of cell companies, and developments at the beginning of this year have only enhanced our reputation for excellence in employing them as insurance products.
Statistics from the Guernsey Financial Services Commission (GFSC) show that, at the end of May, Guernsey had 344 international insurance entities, comprising 254 'pure captives', 68 protected cell companies (PCC), five incorporated cell companies (ICC) and 17 ICC cells. However, it is in the total of 395 PCC cells – an increase of 63 from the same time in the past year, where Guernsey has seen the most development.
A large part of this growth is down to a UK government-backed product utilising Guernsey's experience and reputation for innovation and expertise in the use of cell companies. The mortgage indemnity insurance scheme, introduced by the UK's Home Builders Federation (HBF) and the Council of Mortgage Lenders (CML) in March, sees mortgage risk for the lenders on new build homes underwritten by house builders and the government. By insuring the risk of default losses, the NewBuy scheme allows lenders to offer 95% loan-to-value mortgages on new homes.
The JLT Group is managing and developing the scheme through a joint initiative of its operating companies, including JLT Insurance Management (Guernsey) Limited, which is running the captive insurance company established for HBF. The HBF captive insurance company, at the time of writing, already has 40 cell structures in place, with more submitted and waiting to come on board very shortly.
In a similar vein, broking firm Acumus 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 being managed by Guernsey's Heritage Insurance Management Limited.
Other examples of the island's expertise with cell company structures include:
- Aon's White Rock Insurance Company PCC Limited being 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 – becoming the first ICC in the world to be insurance-licensed.
- Guernsey-based Heritage Insurance Management achieving a worldwide first in 2010 by amalgamating two PCCs – with 17 cells between them – into one.
- Law firm Bedell Cristin in Guernsey advising Swiss ILS managers Solidum Partners AG in 2011 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.
These examples demonstrate why Guernsey retains its place as the number one captive insurance domicile in Europe and the fourth largest globally. It is a position we are keen to protect – if not enhance – and meant that we took careful consideration over our stance regarding Solvency II.
Jurisdictions which are not part of the EU, such as these so-called "third countries" can choose whether or not to seek equivalence under Solvency II. The uncertainty surrounding Solvency II's final form, the practical implications and the timing of its introduction has created issues around Europe and hampered the decision-making process for third countries. But Guernsey opted for certainty when, in January 2011, the island's government and the GFSC issued a joint statement announcing that there were no plans to seek equivalence under Solvency II. Guernsey's announcement provided current and potential clients with certainty on the understanding that, unless there were significant amendments to the terms and conditions, then seeking equivalence was not in the best interests of the island's insurance industry.
Solvency II has been designed to address systemic and group risks within commercial insurance markets, yet, these are risks not generally faced within Guernsey's insurance industry, which is predominantly comprised of captive insurance companies. A captive is usually formed for a specific purpose, primarily self-insurance, and it is called a "captive" because, in its purest form, it is set up by its owners only to insure the risks of its parent and/or fellow subsidiaries. The concept is reliant on the ability to be flexible and adaptable in order to ensure that risks are managed in the most cost-effective and capital-efficient way for the parental group.
We will still 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 the principles of proportionality mean we will provide a more attractive environment for captive owners and other niche insurers.
Under the current proposals, Solvency II is set to impose a number of inflexible requirements. Guernsey believes applying Solvency II as it is currently constructed would burden insurers in the island with additional costs and render currently effective captive business plans uneconomic. Only by remaining outside of the regime can it ensure that it is able to continue to o.er a viable set of captive products and services.
Of course, the background to why Guernsey is so respected in the use of cell companies is because we pioneered the concept back in 1997 with the introduction of the PCC for use in our captive insurance sector.
A PCC is a company made up of a core and individual cells. Each cell is distinct and therefore the assets and liabilities cannot be mixed. The legal segregation ensures that no claim against one cell will be covered by the funds from another. The ICC, like the PCC, has cells but in this case they are separately incorporated and distinct legal entities.
This offers the advantage of greater flexibility in terms of individual cells being able to migrate away from the main structure and also potentially amalgamate or merge with other incorporated entities.
The concept is now used across the financial services world as an alternative application for the structuring of many different types of products. Even the UK – 14 years after the concept was first pioneered by Guernsey – introduced a protected cell regime for UK umbrella open-ended investment companies at the end of 2011.
With Guernsey being the first to adopt the cell company concept, the island has developed a world-class infrastructure for its application, supported by a range of lawyers and accountants with the highest level of expertise and experience in utilising the structure.
Guernsey has since introduced the innovative ICC and through legislative advancements developed a regulatory infrastructure that enables them to be widely employed. In particular; an ordinary company can convert to a PCC or ICC; a PCC can convert to an ICC; an ordinary company can convert into an incorporated cell (IC) and become part of an ICC; and an IC can leave the umbrella of the ICC and convert into an ordinary company. Furthermore, Guernsey allows for inward and outward migration of companies and the amalgamation of companies.
Guernsey remains one of the leading captive insurance domiciles in the world and this is in no small part due to our experience and expertise in using the cell company to provide solutions to the insurance sector and beyond. It is little wonder then that Captive Review recently proclaimed that Guernsey was the "undisputed king of the cell captive world."
Originally published in the Captive Review, Cell Company Guide 2012
For more information about Guernsey's finance industry please visit www.guernseyfinance.com.
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