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, November 2017

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
 
In association with
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
Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:
  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.
  • Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.
    If you do not want us to provide your name and email address you may opt out by clicking here
    If you do not wish to receive any future announcements of products and services offered by Mondaq you may opt out by clicking here

    Terms & Conditions and Privacy Statement

    Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

    Use of www.mondaq.com

    You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). 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 & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

    Disclaimer

    Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd 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 or performance of information available from this server.

    The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

    Registration

    Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

    • To allow you to personalize the Mondaq websites you are visiting.
    • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
    • To produce demographic feedback for our information providers who provide information free for your use.

    Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

    Information Collection and Use

    We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

    We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

    Mondaq News Alerts

    In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

    Cookies

    A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

    Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

    Log Files

    We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

    Links

    This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

    Surveys & Contests

    From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

    Mail-A-Friend

    If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

    Emails

    From time to time Mondaq may send you emails promoting Mondaq services including new services. You may opt out of receiving such emails by clicking below.

    *** If you do not wish to receive any future announcements of services offered by Mondaq you may opt out by clicking here .

    Security

    This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

    Correcting/Updating Personal Information

    If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

    Notification of Changes

    If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

    How to contact Mondaq

    You can contact us with comments or queries at enquiries@mondaq.com.

    If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.

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