Fiona Le Poidevin, Chief Executive of Guernsey Finance, discusses the Island's strong standing in the captive insurance market and what it is doing for its captive companies.
Guernsey's strong standing in the captive insurance market is well known.
The island is the number one captive insurance domicile in Europe and the fourth largest globally, but in an increasingly competitive marketplace, it is vital that Guernsey does not rest on its laurels and remains at the forefront of developments for effective risk management within companies. It was with this in mind that Guernsey decided not to seek equivalence with Solvency II. Instead, it was decided that we would retain our commitment to meeting the standards of the International Association of Insurance Supervisors (IAIS). In doing so, we provided local industry, as well as 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 that were issued in 2011. The fact that 50 percent more licences were issued in 2011 than 2010 is evidence that Guernsey remains a dominant force among captive insurance domiciles. In fact, Guernsey's net gain of 12 international insurance entities was the only tangible growth seen across captive centres in Europe last year. At the end of 2011, 343 captives were domiciled in Guernsey, excluding individual Protected Cell Company (PCC) cells (on the basis that these are not distinct legal entities from the PCC core). An industry survey that collated captive figures put Guernsey more than 100 ahead of its closest competitor in Europe, Luxembourg, with 242 captives, but much further ahead of the Isle of Man (132) and Ireland (101). Globally, the largest captive domicile is Bermuda (862), followed by the Cayman Islands (739), Vermont (590) and Guernsey (343).
The island's captive insurance market was boosted further at the start of this year with the launch of a UK government-backed product that utilizes Guernsey's experience and reputation for innovation and expertise in the use of cell companies. The mortgage indemnity insurance scheme, which was 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 UK government. By insuring the risk of default losses, the NewBuy scheme allows lenders to offer 95 percent loan to value mortgages on new homes. The JLT Group is managing the scheme through a joint initiative of its operating companies, including JLT Insurance Management Guernsey, which is running the captive insurance company that was established for HBF. As of 2 July 2012, 45 cells had been licensed in relation to the scheme's PCC, with more applications to be submitted and processed in due course.
The strength of Guernsey's captive insurance sector is further underlined by the fact that approximately 40 percent of the leading 100 companies on the London Stock Exchange with captives have them domiciled in Guernsey. Indeed, some 60 percent of the international insurers that are 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 in Guernsey. Oil giant BP has its own captive insurance company, Jupiter Insurance, domiciled in Guernsey. Global mining company BHP Billiton has its own captive insurance company in Guernsey too. Stein Insurance Company has assets of approximately $1.3 billion and it had revenue of $214 million in 2011. Stein covers property damage, business interruption, construction, terrorism, marine cargo and some primary general liability for BHP Billiton.
Matthew Frost, vice president of risk finance at BHP Billiton, recently said that the company's finance risk management committee looked at the issue of domiciles approximately 18 months ago, particularly when it significantly increased its self-insurance, and asked whether BHP Billiton was starting "all over again from scratch, given where the management teams are based, would we have a captive and, if so, where it would be located?" Frost said that Guernsey came out on top, along with Singapore, but after BHP Billiton established the pros and cons of each domicile, "Guernsey came out significantly ahead". This endorsement of Guernsey comes as no surprise when the island's innovation and expertise in this field is considered:
- Aon's White Rock Insurance Company PCC 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 (Incorporated Cell Company), which is also owned by Aon, 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 manager Solidum Partners on a CAT bond transfer, namely a private transformer of catastrophe risks into $12.4 million of securities in three separate deals through a Guernsey-based incorporated cell structure, Solidum Re.
These examples are all of companies using the cell company concept for insurance purposes. Guernsey pioneered the concept in 1997 with the introduction of the PCC for use in the captive insurance sector.
A PCC is a company that is 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 an ICC 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 main structure and also potentially amalgamate or merge with other incorporated entities.
The decision not to seek equivalence with Solvency II has given current and potential clients certainty and clarity regarding the regulation of insurance business in Guernsey. Furthermore, 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 that are 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 parent. Guernsey will continue to meet the standards of the IAIS—the International Monetary Fund 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 that Guernsey 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 that applying Solvency II as it is currently constructed would burden insurers on the island with additional costs and render currently effective captive business plans uneconomic. Only by remaining outside of the regime can Guernsey ensure that it is able to continue to offer a viable set of captive products and services. It also means that Guernsey's proposition may be attractive for captive owners and their insurance vehicles that are currently based within EU domiciles, especially where they are writing business outside of the EU.
This may become increasingly so if the uncertainty regarding Solvency II continues and/or if the implications for captives appear particularly onerous.
Other non-EU jurisdictions such as Bermuda, Switzerland and Japan are adopting a different stance. These countries were in the first wave of equivalence applications, but they were not seeking equivalence for their captives, but to protect their international commercial reinsurance industries. Bermuda in particular is seeking to mitigate the impact on its captive insurance business and we will continue to monitor these developments closely.
If the end of last year and the beginning of 2012 are anything to go by, Guernsey remains a dominant force among captive insurance domiciles.
It is certainly something that firms have picked up on. Paul Sykes, the managing director of Aon Insurance Managers in Guernsey, has reported that the number of insurance licences that are issued continues to increase as the implications of compliance with Solvency II become better understood by captive managers and owners. He said that they recognised that Guernsey offers a robust and rigorous regulatory environment that is responsive to innovation while not forcing captives to adhere to the disproportionate demands and excessive capital requirements of Solvency II. Sykes believes that—so far—the Solvency II regime has shown a profound disregard for industry and corporations that exercise prudent risk management by owning and operating captive insurance companies.
While the capital requirements of Solvency II may be appropriate for commercial insurers that are dealing with the general public, many captive managers and owners believe the IAIS international regulatory standards will be sufficient for most traditional captives. He believes that Guernsey will sustain its position as European leader and one of the top four captive jurisdictions globally by embracing IAIS international regulatory standards, without seeking equivalence under Solvency II.
He is actively advising new and existing captive insurance company clients to help them achieve better capital efficiency and cost savings through restructuring their insurance programmes.
Aon is not alone among providers with its confidence in Guernsey, so while the first six months of 2012 have been extremely encouraging for the island's local captive insurance sector, we are just as confident that the remainder of this year will see the island continue to demonstrate its expertise and position as a dominant force among captive insurance domiciles.
Originally published in Captive Insurance Times, April 2012
For more information about Guernsey's finance industry please visit www.guernseyfinance.com.
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