Fiona Le Poidevin, Chief Executive of Guernsey Finance, has recently returned from a visit to Beijing and Shanghai where she was showcasing how Guernsey can assist Chinese corporate entities and (re)insurance groups during a time of economic liberalisation in the country.
Prime Minister David Cameron has just returned from leading a UK delegation to China with the aim of boosting trade between the two countries. His visit followed soon after I had been in the country at the end of November with a delegation from Guernsey which was similarly looking at ways in which the Island could work more closely with China, specifically within financial services.
Our team was led by Guernsey's Chief Minister Peter Harwood, and also comprised Kevin Stewart, Guernsey's Commerce and Employment Minister and William Mason, Director General of the Guernsey Financial Services Commission (GFSC). As well as visiting sector associations and professional services intermediaries, the itinerary also included meetings with Tu Guangshao, the Vice Mayor of Shanghai and the banking, securities and insurance regulatory authorities in Beijing.
Indeed, the GFSC signed a Memorandum of Understanding (MoU) with the China Securities Regulatory Commission (CSRC) at the time and reaffirmed its commitment to a similar agreement that was signed with the China Banking Regulatory Commission (CBRC) in 2011. In addition, a visit was also made to the China Insurance Regulatory Commission (CIRC) which built on the previous meetings that have been held since we opened our office in Shanghai in 2007.
Previously, our discussions have centred on the captive concept and Guernsey's credentials in this area, for example: the first captive in Guernsey was incorporated in 1922; the Island pioneered the Protected Cell Company (PCC) in 1997; there were 778 international insurance entities currently licensed in Guernsey at the end of September 2013; and the first half of the year saw the formation of Guernsey's first insurance-licensed Incorporated Cell Company (ICC) with an Asian-headquartered parent.
However, the captive concept remains relatively unfamiliar to the Chinese. Indeed, while the first captive was established in Hong Kong in 2000 (and a second has just been licensed), it is only now that the first Chinese onshore captive has been formed. A significant reason is that Chinese insurance law doesn't differentiate between types of insurers and therefore the capital requirements are particularly onerous for captives.
Having said that, on this occasion, our visit came just after the Chinese government's Third Plenum which unveiled a series of measures to liberalise the economy, including a pilot Shanghai free trade zone. It is being suggested that the Shanghai free trade zone may see the introduction of more flexible regulation, including potentially lower capital requirements for companies in the zone and we are investigating whether this could apply to captives and commercial insurers and reinsurers.
We were able to explain the way in which Guernsey offers proportional regulation in line with the insurance core principles of the International Association of Insurance Supervisors (IAIS) and that we have been developing our own solvency regime to meet the needs of our specific market. There is significant potential for us to work with the Chinese authorities to help them develop a sustainable regime for captives if they so desire.
Indeed, China is home to some of the largest companies globally, including a number of major state owned enterprises. We would expect them to insure their local risks in a domestic captive but our belief is that once they are more comfortable with the concept and they have developed foreign interests, then it would make sense for them to establish a vehicle in Guernsey to cover their global risk base. This would be in a similar vein to the way in which large American multinationals often have a captive on that side of the Atlantic for their US risks and another in Europe for their non-US risks.
We also see significant potential for globally expanding Chinese (re)insurance groups to establish operations in Guernsey to service business outside China. Our insurance heritage, on-Island expertise, proportionate regulation and close proximity and good links to both the UK and continental Europe mean that we are a very attractive option, especially as our position in the same time zone as London means that we can conduct business with both the Americas and the Far East in the same day.
It is these factors which have made Guernsey a growing centre for Insurance Linked Securities (ILS) – there has been net growth of 41 insurance entities licensed in the Island to the end of September 2013, with industry practitioners attributing much of this to ILS related vehicles – and could also make the Island an attractive home for an operation of a globally expanding Chinese (re)insurance group in the future.
The right conclusion
The Chinese economy is set to open up and, whilst this may take some time to come to fruition, we are ensuring that Guernsey is well positioned to take advantage of the opportunities which may emerge, whether that is assisting with the introduction of appropriate local regulation for captives, acting as a captive domicile for global Chinese corporates seeking to cover their non-Chinese risks or as a centre for Chinese (re)insurance groups to establish an operation to service European (and US) markets.
An original version of this article was published in Insurance Day, December 2013.
For more information about Guernsey's finance industry please visit www.guernseyfinance.com.
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