Guernsey: Domicile Focus – Calm Waters Of The Guernsey Captive Insurance Scene

Last Updated: 19 March 2014
Article by Fiona Le Poidevin

Most Read Contributor in Guernsey, September 2018

Leading insurance figures from Guernsey speak to Strategic Risk about how the Island continues to lead the way with captives, protected cell companies and insurance-linked securities, while also offering certainty against the prevailing Solvency II regime.

Innovation and a firm stance on Solvency II has allowed Guernsey to thrive at a time when rates in the commercial insurance market are "super soft".

There is no doubt there are plenty of challenges facing both the insurance and captive insurance market. Commercial insurance and reinsurance prices remain low following a continued influx of capital market capacity and a year that was free of major catastrophe losses. "Rates are quite soft and yet there's an awful lot of capacity being attracted into the insurance market," says Dominic Wheatley, managing director of Willis Management (Guernsey).

"If you think about those two ideas in tandem, you realise it's a slightly bizarre world we live in – unless you take the view, as I do, that rates may be soft by reference to historic norms, but not as soft as they have been in the past in relation to returns of capital achieved in the insurance industry."

Despite the soft (re)insurance market, Guernsey continued to grow in 2013. The Guernsey Financial Services Commission (GFSC) licensed 89 new international insurers, bringing the total to 758 at the end of the year. This maintains its position as the largest captive domicile in Europe and the fourth largest in the world.

For major corporates, it is clearly a buyer's market in mainstream insurance and the impetus to self-insure is arguably less pronounced. So where is the growth coming from? With the insurance cycle inextricably linked to captive growth, captive managers have had to innovate and seek new opportunities to grow their business. A quick look at Guernsey's licence statistics reveals a number of new trends, with much of the growth relating to cell companies and increasing use of insurance-linked securities (ILS). "I wouldn't say that necessarily the mix of business coming into the island is in line with the traditional mix of business – or is indeed conventionally captives in the sense of being risk-financing vehicles for corporate entities," says Wheatley. "It's more niche, using insurance technology to bring risk and capital together but not necessarily in the corporate risk-financing context."

While maintaining its dominant position within the captive sector, Guernsey has built on its existing infrastructure to offer a broader gamut of insurance and financial solutions. A big part of this is an increase in the use of cells

– a Guernsey innovation, with the first protected cell company (PCC) set up in the domicile in 1997. There are now 69 PCCs and seven incorporated cell companies (ICCs), which are used for risk financing, to conclude International Swaps and Derivatives Association (ISDA) arrangements and fully collateralised ILS transactions. "Guernsey is bucking the trend in terms of its growth, and I really think that is attributable to the innovation in our business," says Paul Eaton, director of new business at Heritage Insurance Management. "For example, an area of significant growth is cells being used to facilitate fully collateralised reinsurance structures.

"We're also seeing the captive market continue making inroads to employee benefits lines. That whole area, including pension fund longevity risk, is really starting to generate significant interest." The UK government chose Guernsey to set up a PCC as part of its NewBuy scheme in 2012. The scheme was launched in conjunction with the

Home Builders Federation (HBF) and the Council of Mortgage Lenders to offer prospective home owners newly built properties with 95% mortgages underwritten by the UK government. The PCC provides insurance to the lenders under NewBuy, as well as being the conduit for the guarantee from the UK government. It has 50 regulated cells, including several multi-user cells.

Affordability issues

Cells also offer a good solution for sectors that are experiencing difficulty in accessing affordable insurance. "A classic use for captives is helping lawyers' with their professional indemnity insurance, when the commercial insurance market hardens or loses capacity," says Eaton. "The last renewal season was difficult and it's been well reported that a large number of companies have had to stop trading or be acquired, as a result of being unable to find the necessary PI insurance. "Heritage recently had a number of enquiries from law firms that had experienced large rate the captive sector, Guernsey has built on its existing infrastructure to offer a broader gamut of insurance and financial solutions. A big part of this is an increase in the use of cells – a Guernsey innovation, with the first protected cell company (PCC) set up in the domicile in 1997.

There are now 69 PCCs and seven incorporated cell companies (ICCs), which are used for risk financing, to conclude International Swaps and Derivatives Association (ISDA) arrangements and fully collateralised ILS transactions. "Guernsey is bucking the trend in terms of its growth, and I really think that is attributable to the innovation in our business," says Paul Eaton, director of new business at Heritage Insurance Management. "For example, an area of significant growth is cells being used to facilitate fully collateralised reinsurance structures.

"We're also seeing the captive market continue making inroads to employee benefits lines. That whole area, including pension fund longevity risk, is really starting to generate significant interest."

The UK government chose Guernsey to set up a PCC as part of its NewBuy scheme in 2012. The scheme was launched in conjunction with the Home Builders Federation (HBF) and the Council of Mortgage Lenders to offer prospective home owners newly built properties with 95% mortgages underwritten by the UK government. The PCC provides insurance to the lenders under NewBuy, as well as being the conduit for the guarantee from the UK government. It has 50 regulated cells, including several multi-user cells.

Affordability issues

Cells also offer a good solution for sectors that are experiencing difficulty in accessing affordable insurance. "A classic use for captives is helping lawyers' with their professional indemnity insurance, when the commercial insurance market hardens or loses capacity," says Eaton.

"The last renewal season was difficult and it's been well reported that a large number of companies have had to stop trading or be acquired, as a result of being unable to find the necessary PI insurance.

"Heritage recently had a number of enquiries from law firms that had experienced large rate increases and the application of substantial deductibles to their policies. This led many of them to seek a captive structure that could accommodate their retained risk," he adds.

"This is a good example of a situation that can cause a medium-sized company to look for a cell company solution."

One of the biggest benefits offered by cell companies is that they lower barriers to entry. "If you look back 20 years, the captives were really the preserve of the FTSE 100s," says Fiona Le Poidevin, chief executive of Guernsey Finance. "Guernsey has about a 40% market share of all the FTSE 100s that have captives, but now, with the cell company concept, SMEs can benefit from the captive model by taking a cell of a PCC.

"That's why they've become so much more popular – they are cost efficient and administration is efficient. It also reflects the sophistication of the captive managers who are able to service different types of clients and types of risk."

Competitive edge

Much of the recent innovation in cell companies and ILS structures has been necessary, explains Wheatley. "New entrants to the industry have emerged in the past two to three years. The competition does inspire people to go out and look for business. There is a real competitive element to the industry here that is very positive.

"Guernsey has a pretty mature industry and has critical mass with well-established expertise, particularly in the cell area. The technical development and innovation around cell structures has always been very strong here.

"There's a real offshore insurance community, which helps in the innovation process. There's movement of people between companies and that leads to a sharing of technology and so on. It all helps Guernsey Plc to grow and attract business."

The dramatic growth of the ILS market has provided plenty of opportunities for captive managers.

Guernsey has been quick to develop a reputation for its special-purpose insurers, cat bonds and transformer structures. In January, Guernsey law firm Bedell Cristin was recognised for an Islamic finance deal placed on behalf of European insurance group FWU.

"A lot of the growth we've seen in the insurance industry over the past year has been in ILS, so it's been quite good to see us diversifying," says Le Poidevin. "At the end of 2012, ILS investment fund DCG Iris was listed on the London Stock Exchange and it has been very successful to date. "We have formed a group with representatives from both the funds and insurance industry, so we're better able to promote our services in that area. Not only are we able to create the insurance structures but we're also able to set up funds and to carry out the listings work. Indeed, Guernsey has more entities listed on the London markets than any other non-UK jurisdiction." The capital markets – increasingly pension funds and institutional investors – are showing increasing comfort in investing in insurance products such as industry loss warranties, catastrophe bonds and collateralised reinsurance entities. The yield on offer in the low interest rate environment has captured their interest and the fact that insurance risk is largely uncorrelated to other markets is also attractive.

While up to 75% of ILS capacity is currently focused on US catastrophe risks, this is expected to change in the future as the sector expands and develops. As London and Zurich grow their importance as ILS centres, Guernsey should benefit further, Le Poidevin believes. "There are a few key players here in the market, but we also have several lawyers who are well versed in ILS now. There have been some prominent listings on the Channel Islands Securities Exchange based in Guernsey, so we can offer quite an efficient route to market," she says.

"Guernsey also has the highest number of listings on the London Stock Exchange outside the UK. At the same time, Guernsey has an incredibly successful investment funds industry, so we're able to marry up the insurance experts with the fund managers and fund administrators and it makes a lot of sense to do that."

"No" to Solvency II

Another factor that has boosted business is the decision not to seek equivalence with Solvency II. At a time when rival domiciles are getting ready to implement Europe's new regulatory regime for the insurance sector, Guernsey announced in 2011 that it would not be going down that route. And, as Le Poidevin explains, that decision has offered certainty to the domicile's international client base. "Some of the growth we've seen in the captive sector over the past couple of years has probably come from the decision we made about Solvency II," she says. "We've seen quite a few migrations recently from Bermuda because we've been able to give that certainty.

"Guernsey is not in the EU, so we chose not to participate in the directive or seek equivalence as a third country. Solvency II was set up to protect third-party policyholders and it just doesn't suit the captive model at all." Under Solvency II's "narrow definition" of captives, 80% of European captive insurers would fail to benefit from proportional treatment under the new regime, warns ECIROA (the European Captive Insurance and Reinsurance Owners' Association). In a letter to the European Commission, the association refers to a "number of outstanding issues that we look forward to resolving with the Commission and EIOPA".

"Without doubt, the current business mix in Guernsey would not be sustained were Solvency II equivalence to be pursued," says Wheatley.

"The regime will be quite onerous for certain types of captive vehicle and create a fairly hostile environment. Not because Solvency II is fundamentally unreasonable in the context of mainstream insurance, but because in the context of the relatively small niche of insurance structures we specialise in in Guernsey, Solvency II would be an inappropriate regime and one that would be difficult to sustain on an economic basis."

Regulatory burden

He continues: "It does place a significant regulatory burden on captives potentially and I would think that does actually present a little bit more of a barrier to growth. "On the other hand, Willis is still working with people to set up captive vehicles in Europe and for companies for whom Europe is their dominant theatre of operation. If they've got scale and a sophisticated approach to risk management and risk financing, then captives can still work and do still work in a Solvency II environment." The biggest concern for European captive owners is the capital requirements under Solvency II. Those that fall within the scope of the regulation and do not qualify for proportional treatment (eight out of 10, according to ECIROA) will be subject to significantly higher solvency requirements than now. Monoline captives are particularly likely to see their capital burden increase substantially.

"I've had a lot of feedback from clients thanking us for not going down the Solvency II equivalence route," says Martin Le Pelley, compliance director at Heritage Insurance Management.

"In Guernsey, we are developing a risk-based regulatory regime that will be calibrated to a 90% confidence level rather than 99.5%, which is what Solvency II requires, because 90% is deemed to be an appropriate level for captive insurance. This means the solvency requirements will be comparatively lower than would be the case in Europe and captive owners will continue to take advantage of an appropriate capitalisation of their captive.

"We're hopeful that people are going to start making some strategic decisions. We're already seeing strategic decisions being made because of the fact that Guernsey is taking a different stance with regard to risk-based regulation. We're seeing decisions being made to set up captives in Guernsey rather than the EU because the EU hasn't taken proper consideration of the impact of the Solvency II regime on captives."

An original version of this article was published in Strategic Risk, February 2014.

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
GuernseyFinance
GuernseyFinance
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
GuernseyFinance
GuernseyFinance
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