Guernsey: Guernsey Maintaining Captive Insurance Quality

Last Updated: 12 April 2013
Article by Martin T. Le Pelley

Most Read Contributor in Guernsey, September 2018

Guernsey's decision not to seek equivalence with Solvency II should not be seen as a sign its regulations are in any way lower quality than other jurisdictions, according to Martin Le Pelley, the immediate past chairman of the Guernsey International Investment Association.

When Martin Le Pelley became chairman of the Guernsey International Insurance Association (GIIA) in 2011, the island's insurance industry was very much in the process of redefining itself in relation to the outside world, particularly in relation to the rest of Europe. Indeed, Le Pelley took up his new role just as Guernsey was debating Solvency II equivalence.

"It was an interesting time as the insurance industry was against the idea, but the regulator was in favour. Thankfully the GIIA, as the industry trade body, was able to persuade the decision makers to hold back on seeking equivalence as it was clear it was not appropriate as a regulatory regime for the Guernsey insurance market," he explains.

At the same time, there was also a move to change the international perception of the Guernsey insurance sector from one that is totally defined by its well-developed captive insurance industry to a domicile also attractive to other kinds of insurance business. The captive industry also includes the 19 insurance management companies based on the island. The broad range of services provided by these companies hints at the diversified nature of the captive insurance industry as well as that of the much smaller commercial third-party insurance industry.

The latter is represented by companies such as Generali and Hiscox, which respectively write niche life and non-life international risks, often on a non admitted basis. The business model represented by these two companies forms a significant part of the GIIA's vision of a more diversified international insurance sector in Guernsey.

Variety and depth

Le Pelley stresses the variety and depth of expertise of the players in the captive market. "The insurance managers come in all shapes and sizes. The broker-managers Aon, Marsh, Willis and JLT are all represented, although they are not necessarily the largest insurance managers on the island." The selling point for the broker-managers, Le Pelley says, is they can offer their broking clients a captive service alongside their traditional broking activities.

There are also a number of independent insurance managers which cater for clients who value the captive service as a standalone product. "Their clients may wish to divorce their broker's services from the captive manager's services, and reduce any risk of conflicts arising. "Furthermore, by separating the broking and captive management, it gives the captive owner more control over their service providers. Finally, there are a number of brokers who do not have their own captive-management operations, and therefore prefer to recommend independent captive managers to their clients rather than passing business to their competitors," he says.

Indeed, the name of the insurance association itself is very much part of the redefinition referred to earlier. Fewer than 12 months before Le Pelley became chairman, the GIIA had been known as the Guernsey Insurance Company Management Association (GICMA). The new name is intended to reflect the changes that have taken place in Guernsey over several years and have been largely obscured by Guernsey's reputation as the biggest and most innovative captive centre in Europe.

Innovation

The ability to continue to innovate is central to the future of the captive industry in Guernsey. The concept of the protected cell company (PCC) was devised in Guernsey in 1997. The PCC, or a variation on it, is the most widely used structure in the captive industry today. Cell companies are frequently employed in the area of insurance-linked securities to transfer catastrophe reinsurance risks to the capital markets. Guernsey was in the news last year when a cell structure was used to help mitigate against the risk of negative equity associated with the UK government's NewBuy mortgage schemes under which banks make loans of up to 95% of the value of the property to first time home buyers in England and Scotland. The use of these cell structures has contributed most to the growth of the insurance industry in Guernsey last year. Insurance was the only part of the island's financial services sector to growin2012. So, without downplaying the importance of the captive industry to the island, GIIA's new message is there is more to the future development of the Guernsey insurance sector than captives.

"The change of name was made to better reflect the make-up of the membership of the association, which consists of a variety of commercial insurers with Guernsey subsidiaries, such as Generali and Hiscox, as well as the many captive and third-party insurers under management," Le Pelley, who stepped down as chairman of GIIA after two years in the role, says. The GIIA chairmanship is a part-time position. In his day job, Le Pelley is director of compliance at Heritage, one of the largest independent insurance managers in Guernsey.

Global outlook

The word "international" in GIIA simply reflects the fact the association's core membership is involved in insuring non-domestic policyholders. "As such, the GIIA is concerned more with Guernsey's reputation as an attractive centre for niche or specialist non admitted or reinsurance products for use by international clients, rather than representing local brokers or insurers providing personal lines products to local residents. The international insurers represent the vast majority of insurers, both in terms of number and premium levels, operating in Guernsey," LePelley says.

The point is clearly demonstrated by the insurance market statistics issued by the industry regulator, the Guernsey Financial Services Commission (GFSC). According to the latest GSFC figures, the domestic insurance industry in Guernsey consists of eight insurers and 40 intermediaries. By comparison, the international insurance industry consists of 739 entities. This figure includes 269 companies. The vast majority of these are captive insurers but over the years, this number has increasingly included commercial insurance companies active in the traditional insurance or reinsurance markets.

Solvency II

One of the functions of the GIIA is to lobby local government, regulatory authorities and international bodies on behalf of the insurance industry in Guernsey. For Le Pelley, the biggest issue that arose during his tenure was undoubtedly that of Solvency II equivalence. "There is still much uncertainty over Solvency II, both in terms of its implementation date and the way in which different EU regulators will apply it."

Furthermore, Le Pelley says, there is uncertainty as to how equivalence would work. He is not un aware of the benefits of Solvency II. "As a regulatory regime for commercial insurers, Solvency II is prudent and a vast improvement on the existing regulatory regime. However, the 99.5% value-at-risk [VaR] confidence level built into the Solvency II directive makes it impossible to flex the regime for insurers that are not commercial/third-party insurers and do not possess the risk characteristics of a typical commercial insurer. As Guernsey's insurance market has very few truly commercial third-party insurers within it, the Solvency II regulations do not seem to address properly the regulatory requirements of Guernsey's market."

A major concern for the industry in Guernsey is a large number of captives would be left technically insolvent under the capital adequacy rules of Solvency II. The GIIA, Le Pelley says, lobbied hard to persuade the government in Guernsey to reject the offers of equivalence the European Commission had made, despite the GFSC wanting to accept them. However, the GIIA have since worked closely with the GFSC to develop an alternative risk-based solvency regime that is fully compliant with the International Association of Insurance Supervisors' (IAIS) Core Principle 17. Although this work is still ongoing, Le Pelley is optimistic it will reflect Guernsey in a very good light.

"It will evidence Guernsey's compliance with international best practice, while also freeing up the GFSC to regulate Guernsey's insurance market with a much more appropriate regime for the type of risks that are inherent within it," he says.

Non-captive entities

This raises the question of the implications of a non-Solvency II compliant regulatory regime for the non-captive insurance entities operating out of Guernsey. These are small in number, but that is likely to change in the future. For example, to what extent will these entities be negatively affected by the absence of a Solvency II-equivalent regulatory regime in Guernsey?

Le Pelley says it is important to remember Guernsey is not, and has never been, a member of the EU.

"As such, Guernsey insurers cannot take advantage of the Freedom of Services legislation that is available to other EU-domiciled insurers, and therefore the risk to EU citizens from Guernsey applying different regulatory requirements on its insurers is minimal, as the only way for Guernsey insurers to insure EU persons directly is though a non-admitted policy (if legal) or using an EU fronting company (in which case they are providing reinsurance)".

In addition, he explains, most insurers in Guernsey are captives, which means their risk appetite is aligned with their parent company's risk appetite, and this is also the insured party. "As a consequence, the imposition of a fixed regulatory 'confidence level' such as 99.5% VaR as per Solvency II, may not equate with the risk appetite of the captive's parent company such that this would then force the captive to hold too much capital unnecessarily, or else provide an inadequate level of insurance cover. It is for this reason, among others, the GIIA argued Guernsey should be allowed to regulate its insurance market to a level that matched with the risk appetite of the insured parties within it."

So, the way Le Pelley and the GIIA sees it, in the absence of Freedom of Services legislation in Guernsey, there is no real negative impact on the captive market from not having Solvency II equivalence. "In fact, most captive owners are relieved and glad Guernsey has taken this approach. Even the ability of Guernsey insurers to buy reinsurance or to obtain fronting arrangements seems not to be affected as most commercial fronting companies and reinsurers are using internal pricing models already to assess the price of the provision of fronting or reinsurance services to captives, whether inside or outside the EU," he says.

Rigorous framework

Another question is to what extent will the lack of a Solvency II equivalent regulatory regime in Guernsey affect the view of regulatory authorities in other countries about the quality of the arrangements in place in Guernsey? In other words, how will it affect Guernsey's reputation as a financial centre that is not only cost efficient but also has a responsible, rigorous, risk-based insurance regulatory framework in place?

Le Pelley responds by pointing out Solvency II is the EU's preferred regulatory approach for insurance.

"But it is not, nor will it ever be, the only regulatory regime for insurance. Indeed, the US is a much larger insurance market than the EU, and there are no plans for the US to apply Solvency II, or even for the US to obtain Solvency II equivalence in the short to medium term.

"As such, Guernsey is, and will continue to be, assessed by the International Monetary Fund and other international bodies against the recognized international regulatory standards as defined by the International Association of Insurance Supervisors [IAIS]. Guernsey has always sought to comply in every material respect with the IAIS core Principles and this won't change.

"Guernsey's decision not to seek equivalence with Solvency II should not be seen as a sign its regulations are in any way a lower quality than other jurisdictions. In fact, Guernsey is the most compliant jurisdiction in the world in relation to the IAIS core principles, and so should be regarded as the highest quality in relation to regulatory arrangements."

Change in government

While the GIIA's outlook is decidedly global, there was a need during his tenure as chairman, Le Pelley says, to explain the role of the insurance industry and raise its profile within Guernsey itself. This was due to the change of government in Guernsey after the elections in April 2012, which meant a whole new set of ministers came into power in May and the GIIA had to ensure the role of the insurance industry was properly represented within the new government.

This involved a number of meetings between GIIA and the new ministers, to raise their awareness of the issues of the day and seek assurances as to what the government was planning to encourage more insurance business to the island.

Le Pelley says he was greatly encouraged by the new minister for commerce and employment who has engaged constructively with the industry and is fully supportive of the opportunities for growth in the Guernsey insurance market. Lobbying the government is a hugely important activity for the GIIA given Guernsey's small population and tight immigration laws, which mean the availability of qualified insurance professionals is more directly linked to government policy than it is in other, more populous countries.

For example, the ability for nonlocal people to come to work in Guernsey is dependent on the availability of housing licences, which allow qualified and experienced people to live and work in Guernsey. "During my tenure we contributed to a consultation by the government on an overhaul to the housing licence laws that sought to free up the ability of companies to seek and recruit experienced non-locals for specialist roles," Le Pelley says.

Geography

There is a move to attract more business from Asian and Latin American captives to Guernsey. However, for companies based in these regions, there is the inconvenience of geographic distance and different time zones. So what has Guernsey got to offer captives from Asia and Latin America that other captive centres in the Caribbean, Singapore or Macau cannot offer them? For Le Pelley, the key to Guernsey's continued success as a captive domicile is down to the amount of experience the industry players have in this market, as well as the number and variety of players in the market. It is important, he says, for Guernsey to be both competitive and wide ranging in its areas of specialism.

Furthermore, he stresses the proximity to the London market. Guernsey is only a 40-minute flight from London. "Being close to one of the most important insurance markets in the world means Guernsey can work with all the specialist market participants in London, which place cover and manage risks for international companies on a daily basis. At the recent Captive Service Awards in London, Guernsey and its service providers swept the board in comparison to the other domiciles. This is because most captive owners are more concerned about ensuring their captive is operating in a well-developed, reputable market that is well regulated, rather than simply choosing a geographically convenient domicile. After all, as teleconferencing, social media and technology continues to advance, the world is becoming ever smaller."

Originally published by Insurance Day, March 2013

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.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Similar Articles
Relevancy Powered by MondaqAI
GuernseyFinance
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
GuernseyFinance
Related Articles
 
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions