Guernsey remains at the forefront of the cell industry and has seen considerable growth in the past few years. Fiona Le Poidevin of Guernsey Finance gives her insight on how the island has become a leader in insurance entities.
Guernsey has reaffirrmed its position as a cell company leader over the past 12 months with considerable growth in its insurance sector. The island remains ranked as the number one captive insurance domicile in Europe and the fourth largest globally. Figures from the Guernsey Financial Services Commission (GFSC) show that at the end of May 2013 Guernsey had 761 international insurance entities, comprising of 241 traditional captive companies, 70 protected cell companies (PCC) and 423 PCC cells, five incorporated cell companies (ICC) and 22 ICC cells.
It is interesting that while traditional captive licences decreased by 13 from 254 at the end of May last year, the use of cell structures, particularly PCC cells, has risen considerably. In fact, the number of PCC cells has increased by 28 from the same time last year, while ICC cells have risen by five.
This does not suggest there is no longer a place for the traditional captive company as data for the four year period until 31 December 2012 showed that there had been an additional 27 companies licensed in the island. This figure may be outweighed by the number of surrenders over the same period, but much of this can be put down to the consolidation that followed the global economic crisis and the demands of shareholders.
Indeed, risk consultants continue to recommend pure captives as an ideal solution for many clients, but the development of the cell concept means there are now distinct benefits for many small- and medium-size businesses, including:
- Lower operating costs – savings from reduced reporting requirements and shared costs
- Less management time – reduction in the amount of executive time required by the cell owner
- Quicker and cheaper to set up and exit – setting up and closing down a PCC cell does not require the same legal processes required to incorporate or wind up a company
- Reduced capital requirement – there is a need to cover the minimum margin of solvency and the risk gap but this may be less than the £100,000 minimum required for a standalone captive
Guernsey pioneered the cell company concept back in 1997 when it introduced the PCC for use in the captive insurance sector. The success of this innovation is illustrated by the fact that the cell company is now used across the financial services world as an alternative application for the structuring of many different types of products. The island also boasts provisions that give notable flexibility to cell company structuring arrangements.
Towards the end of 2012 the Guernsey Parliament gave its principle approval to make it possible for a PCC cell to convert into a standalone company. The UK government-backed NewBuy scheme, introduced by the UK's Home Builders Federation (HBF) and the Council of Mortgage Lenders (CML), was responsible for a large part of Guernsey's PCC growth in 2012. Under this scheme, mortgage risk for the lenders on new build homes is 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. JLT Group manages the scheme through a joint initiative of its operating companies, including JLT Insurance Management (Guernsey) Limited. The HBF PCC now has more than 50 related cells.
Other examples of Guernsey's innovation and expertise in the cell structure field include:
- 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 globally
- 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
Insurance-linked securities (ILS)
Guernsey is also playing a more prominent role in increasing the popularity of insurance-linked securities (ILS), another source of significant cell growth, especially for incorporated cells. ILS are financial instruments, such as catastrophe bonds (cat bonds), used to securitise insurance risks and transfer them to the capital markets. ILS funds have also used collaterised reinsurance as a means to participate in the reinsurance markets for which Guernsey cells have been an effective vehicle. Indeed, many of the new structures in 2013 have been set up for this purpose.
Bedell Cristin's Guernsey office played a pivotal role by providing legal expertise to Swiss ILS managers Solidum Partners AG for the establishment of Guernsey reinsurance structures and a related catastrophe reinsurance risk listing on the Channel Islands Stock Exchange (CISX). The catastrophe reinsurance risk listing, which took place towards the end of 2012, was the first private cat bond listed on any exchange worldwide.
Cedric Edmonds, partner at Solidum Partners and director of Solidum Re Eiger IC Limited – the Guernsey incorporated cell – said Solidum Partners selected Guernsey as a jurisdiction for its cell reinsurance company and private cat bonds platform due to its ICC legislation and the quality and 'can do' attitude of the service providers when faced with something new. John Rowson, executive director of Aon Insurance Managers (Guernsey) Limited and a director of Solidum Re Eiger IC Limited, has also referenced Guernsey's proximity to London and its proportionate regulation as key reasons why the jurisdiction has a great opportunity to grow in a space where innovation and experienced legal firms are essential.
Another notable development in the ILS sphere came last year when Dexion Capital in Guernsey launched DCG Iris, an innovative ILS fund on the main market of the London Stock Exchange (LSE) that has now raised more than £50m. The company is a feeder fund, investing its assets in the CS IRIS Low Volatility Plus Fund, which is managed by Credit Suisse AG. The fund offers investors diversification, while the portfolio is diversified across regions for natural catastrophes and risk types such as Japanese typhoons, US hurricanes and explosions or fire. The fund offers further diversification to investors as returns are expected to have a low correlation to the financial markets.
In January 2011 Guernsey announced it was not seeking equivalence under Solvency II, which may not be implemented until 2016 at the earliest. The island sought to give current and potential clients certainty and clarity regarding the regulation of insurance business in Guernsey, as well as the cell structures used within the sector. The island also believes applying Solvency II as it is currently constructed would burden insurers in Guernsey with additional costs and render currently effective captive business plans uneconomic.
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, Alternative Risk Management (ARM) and Kane. The sector is also complemented by banking, investment and fiduciary sectors and supported by a network of professional services, including legal, tax, accounting and actuarial advisers. This meant that presenting and explaining the island's stance on Solvency II as clearly and as early as possible was of high importance.
The strength of Guernsey as a captive insurance domicile is underlined by research showing that approximately 40% of the leading 100 companies on the London Stock Exchange with captives have them domiciled in Guernsey. Indeed, a significant majority 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 all established captives in the island. Guernsey's experience, expertise, flexibility and creativity with cell companies mean that these firms can rest assured that the island will continue to be at the cutting edge of developments with the cell company concept well into the future.
Fiona Le Poidevin is chief executive of Guernsey Finance, the promotional agency for Guernsey's finance industry. Previously a senior tax manager with a large accountancy firm, she has over 15 years' experience working in financial services in both the UK and Guernsey.
Originally published in Captive Review's Cell Company Guide 2013, July 2013.
For more information about Guernsey's finance industry please visit www.guernseyfinance.com.
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