Fiona Le Poidevin of Guernsey Finance looks at the island's success as a captive insurance domicile and its emergence as a centre of excellence for insurance linked securities.
The latest figures from the Guernsey Financial Services Commission (GFSC) show that Guernsey continues to grow its insurance industry. At the end of December 2013, there were 758 licensed international insurers in Guernsey – a net growth of 21 international insurers over the previous 12 months. Much of this growth relates to the use of protected cell companies (PCCs), incorporated cell companies (ICCs) and associated cells within the increasingly popular concept of insurance linked securities (ILS).
The reasons for the attractiveness of ILS as a structure and an alternative asset class for insurers and investors are two-fold:
- ILS permits an insurer to purchase additional protection for low frequency, high severity losses, including natural and non-natural perils, operating in the traditional insurance market, typically in the form of catastrophe 'cat' bonds or collateralised reinsurance.
- Investors like ILS because returns are non-correlated with the general financial markets.
Guernsey's great strength is that it has a long and strong heritage in both the investment funds and insurance sectors, making it the optimum location for ILS. Remember, Guernsey pioneered the cell company concept back in 1997 with the introduction of the PCC for use in the captive insurance sector.
The subsequent success of this innovation is illustrated by the fact that we're ranked as the number one captive insurance domicile in Europe and the fourth largest globally, while the cell company is now used across the financial services world as an alternative application for the structuring of many different types of products. As well as adopting the similarly innovative ICC, the island has, through legislative advancements, developed a regulatory infrastructure that enables them to be widely employed.
PCC and ICC structures provide a low cost, low administration vehicle to access returns from the reinsurance market and some ILS funds avail themselves of both within their growth strategies.
At the time of writing there are in excess of 50 protected cells established in Guernsey across four different PCC platforms having written fully collateralised reinsurance primarily covering property catastrophe risks, marine, crop and other classes such as premium rein- statement or prize indemnity.
Protected cells in Guernsey are also being used to conclude International Swaps and Derivatives Association (ISDA) arrangements as an alternative to a reinsurance contract. In 2012, the Channel Islands Securities Exchange (CISE), formerly known as the Channel Islands Stock Exchange (CISX), became home to the first private catastrophe bond listed on any exchange worldwide when Aon Insurance Managers in Guernsey – which has been involved with more than 80 ILS transactions since 2006 – worked with Swiss ILS manager Solidum Partners AG to establish Solidum Re Eiger IC Limited.
It is an insurance vehicle which listed bonds with a value of $52.5m on the CISE and was the first CISE listing where natural catastrophe perils are the underlying exposure for 'principal at risk' notes. It also incorporated a dual listing with the Vienna Stock Exchange. Cedric Edmonds, partner at Solidum Partners and director of Solidum Re Eiger IC Limited, said Solidum Partners selected Guernsey as its jurisdiction of choice for its incorporated cell reinsurance company and private catastrophe bond platform due to the "incorporated cell company legislation and the quality and 'can do' attitude of the service providers".
As Europe's number one captive insurance domicile, the island plays host to subsidiaries of global names such as AIG, Aon, Barbican, Catlin, Generali, Hiscox, JLT, Marsh, Old Mutual, Royal & Sun Alliance, SCOR 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. The pre-eminence of Guernsey as a captive insurance domicile is underlined by the fact that approximately 40% of the leading 100 companies on the London Stock Exchange with captives have them domiciled in the island. 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. Oil giant BP has its own captive insurance company, Jupiter Insurance, domiciled in Guernsey, as does global mining company BHP Billiton through Stein Insurance Company.
In January 2011 Guernsey announced it was not seeking equivalence under Solvency II. We declared our stance as early as possible because we wanted to give current and potential clients certainty and clarity regarding the regulation of insurance business in Guernsey. 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, particularly as Solvency II was not designed for captives as they have parent companies as their policyholders.
The European Captive Insurance and Reinsurance Owners' Association (ECIROA) has similarly found issues with the way Solvency II has been drawn up. The Directive may have had its implementation date pushed back to 2016, but as it currently stands eight out of 10 European captives would fail to qualify for solvency capital treatment because they carry liabilities underwritten for disposed entities, according to ECIROA. If the rules go unchanged then ECIROA believes many captives will be forced to close or move outside of the EU to escape the onerous capital and reporting requirements required under Solvency II.
We certainly feel the early clarity we gave in relation to Solvency II has played a part in the continued growth of our captive sector over the past couple of years. Indeed, a number of Guernsey practitioners have already reported receiving instructions to migrate captives from jurisdictions such as Bermuda to Guernsey, due to the uncertainty created by the delays associated with Solvency II and the requirements for equivalence within the Directive itself. This clearly demonstrates that captive owners recognise Guernsey's expertise in the sector. They like our close proximity to London, our speedy and proportionate regulation and that our decision not to seek equivalence with Solvency II had the backing of owners with captives already in the island.
The insurance industry in Guernsey has its origins dating back to the 18th century and the island's first captive insurance company was incorporated in 1922. Since that time we have continually evolved our offering, with
ILS becoming just the latest concept that can capitalise on the expertise we have honed in the captive insurance markets and which, in turn, further enhances our attractiveness as a location of choice.
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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