David Riley, head of office at Marsh Management Services Guernsey Limited and chairman of the Guernsey International Insurance Association Regulatory & Technical Committee, discusses the proposed changes to Guernsey's solvency regime.
Guernsey as a domicile offers a full range of captive solutions. It was the innovator of the PCC structure and the more recent ICC structure. The benefits of domiciling in Guernsey are clear; however, as the global captive space develops increasing standards as a result of regulation, changes to Guernsey's regime will become necessary to remain a world leader in this space. Recently the Guernsey Financial Services Commission (GFSC) has sought to make a number of changes to the Guernsey solvency regime, which is a good example of regulatory consultation with the industry. The process started in early 2012 with a GFSC discussion document concerning a move toward risk-based solvency. This recognised the fact that Guernsey has previously announced intentions not to apply for Solvency II equivalence, a decision which has been fully supported by the industry.
However, Guernsey has made it clear that the island would continue to comply with the Insurance Core Principles issued by the International Association of Insurance Supervisors (IAIS). For Guernsey to continue to comply with its commitments to the IAIS, it was necessary to re-look at its current regulations. In addition, the IMF conducts regular reviews of the island and if Guernsey didn't operate under a risk-based solvency regime, particularly given that the IMF will be looking at other onshore jurisdictions which are subject to Solvency II, then it could be argued that it is non-compliant.
The initial discussion document asked the industry to look at a variety of matters, including the definition of captives and non-captives, a confidence interval akin to that seen within Solvency II, and what is appropriate in a jurisdiction like Guernsey. Another point that came through the IAIS was called the ladder of intervention, which effectively asks 'what are the trigger points of regulatory interaction with licensees, captives, insurers, etc. and how does that escalate?'
Once the industry had responded to the GFSC on the discussion document, they issued the first version of the risk-based solvency spreadsheet, which was then put to various clients, amended, and sent out again in new versions. From this, the need for a trade-off was brought to light. If the regulator was to allow the industry to drill down deeply into the data on individual policies and types of peril countries with the level of regularity that you have in Solvency II, you can build up a more accurate solvency picture. However, the trade-off is the amount of time and effort involved in this, therefore simplification was brought in.
For example, if we have one level of solvency required for property – whether that represents an office block in London or an offshore drilling rig in the Gulf of Mexico – the solvency requirement is the same for those two property perils. This may seem intuitively wrong, however the alternative is to have considerable work involved for the captive manager and potential cost involved for the client, that they don't find of benefit. There is also a lot of debate about calibration for the solvency factors and the general consensus was to base these on Solvency II as it has been looked at across a wide pool of licensees and is well understood and recognised.
In Q1 2013, the GFSC requested a number of licensee test spreadsheets as a means of establishing the impact of solvency, and published the results in September. This looked at 116 non-life insurers, of which 84 were captives, with the balance being what is now categorised as commercial insurers. Risk-based solvency was found not to have a huge impact on the ability of licensees to meet their solvency requirements. That's not to say solvency requirements didn't change, but because of the way the risk-based solvency spreadsheet was calculated in terms of assets and liabilities, it wasn't a major issue. This positive result is a sign proper consultation took place. In addition to the impact assessment, in September 2013 the GFSC also released a document involving insurance regulation, A Consultation Paper on the Revisions of Regulations, Rules and Codes for Licensed Insurers, looking at risk-based solvency, categorisation, corporate governance and public disclosure.
There was considerable discussion from this around risk-based solvency and the distinguishing line between a captive and a commercial insurer. Some companies are clearly captives, writing first-party risk, while others are clearly commercial insurers writing, insuring or reinsuring third-party risk.
However, if you have, for example, a retailer that insures its own property damage in its captive but also provides some warranty business, then how does that fit in the scheme of things? The GFSC released further guidance to answer this question in that a captive can still be called such even if it is writing that warranty-based risk, as long as the contract is going to another part of the same group (which is a pure captive), a member of association (therefore mutual), but also if the insurance policy is incidental to the transaction with customer, it can still be deemed a captive and enjoy the proportionate benefits therein.
This has caused people to look at their client base in a different manner and make sure clients fully understand the differences between captives and commercial insurers. Another positive from this process is an approved asset regime which categorises assets that are held by captives and commercial insurers. Under the proposed regime, there will be no approved asset protocol, meaning every asset will rank towards solvency but the amount it ranks depends on the nature of the asset itself, making for a simplified and more efficient process around upstream loans which currently require regulatory interaction.
The Guernsey International Insurance Association Regulatory & Technical Committee sent a response on behalf of industry to the GFSC in December. Certain managers chose to make separate responses, which is completely understandable as each manager has a different client base. The GFSC are looking at the responses received and plan to engage with the industry next month to start the process. We are currently looking to have regulations in place by the end of this year for implementation in 2015. The GFSC have been very open to discussing this in an appropriate manner to ensure that the changes are proportionate to the requirements of the industry in Guernsey.
These changes are vital to ensuring Guernsey remains a leading, competitive domicile in light of increasing regulatory standards. The fact that we have regular IMF visits and reviews of our regulatory regime is important for the credibility of Guernsey. Therefore, there is an expectation that we will be able to demonstrate our compliance with the relevant core principles.
However, the risk-based solvency has to be brought in a proportionate manner to allow the business to continue in Guernsey in a sensible and efficient manner and allow us to bring new business to the island. The changes may require further data to be included than is in place at present and captive managers will need to assist clients with the preparation of that data and bringing it into spreadsheets once the final version has been released. At Marsh, we are certainly looking to be able to work with our clients in an efficient manner to assist and comply with the requirements going forward.
As far as the continued growth of Guernsey over the next few years, I see no reason that the trends that have been demonstrated by Guernsey over the last couple of years in respect to licences should cease. We have a regulator that is supportive of the industry, but in an appropriate manner and is engaged with the industry to help it develop.
An original version of this article was published in Captive Review's Guernsey Report 2014.
For more information about Guernsey's finance industry please visit www.guernseyfinance.com.
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