Guernsey: Captive Insurance – Taking The Plunge

Last Updated: 10 July 2014
Article by Fiona Le Poidevin

Most Read Contributor in Guernsey, September 2018

Domiciles and captive managers are wise to explore the business potential emerging from frontier markets such as Asia and Latin America, says Guernsey Finance's Fiona Le Poidevin.

This year's Marsh captive benchmarking report highlighted that the most common form of new formations in the US are from midsize companies establishing small captives writing $1.2bn in premium or less.

Indeed, in recent issues of Captive Review there has been an increased focus on 'micro-captives' and in particular, Ross Elliot, captive director at the Utah Insurance Department (UID), was quoted as saying that around 85% of its licensed entities are micro-captives. These examples highlight the maturity of the captive insurance market in the US and it is a similar picture on the other side of the Atlantic in Europe.

With many of the larger organisations already having captives (or deciding that one does not form part of their risk management strategy), captive managers are seeking out new business from small and medium sized enterprises.

Of course, this in itself has been made more viable by the innovation of the cell company concept, which was pioneered in Guernsey in 1997.

Marsh's report also highlighted that captives are increasingly writing a wider range of risks. However, while diversification in terms of types of companies and types of risks might provide some short term business opportunities, if the captive industry really wants to grow over the long term then it needs to look beyond the traditional geographic markets of the US and Europe and more towards the emerging markets which are becoming increasingly aware of the captive concept.

Economic development

This is something which we are already embracing in Guernsey to ensure that our business base is truly diversified on a global basis. Yet, I will not pretend that it is always going to be a 'quick win' and in fact, our experience is that the ease with which it will be possible to attract captive insurance business from an emerging market will be largely dictated by the stage of its economic maturity.

We have been researching a number of different jurisdictions to assess where there is a potential demand for services from Guernsey's finance industry, which is broadly based on the four key pillars of banking, wealth management, investment funds and insurance. What we have found is that emerging economies tend to go through stages of development which are related to a demand for particular services. For example, an initial surge in wealth creation brings with it a need for asset protection and management and therefore, as well as traditional banking services, there is increased demand for more sophisticated tools such as trusts and foundations.

As a country becomes wealthier and more mature so there is increased realisation of the importance of planning for the future, especially saving and this drives forward the development of domestic pensions and insurance industries which, in turn, help grow an investment sector.

This is looking for ways to deploy capital which will produce a return and a major opportunity is to invest in domestic businesses and make them more efficient, which is in effect the private equity model.

So we can see how economies develop in stages and, depending on the level of maturity, then there will be a range of services which Guernsey as an international finance centre can offer either individuals or organisations from those countries. In a sense, captive insurance is like the icing on the cake because it requires the economy to be at a reasonably well-developed level of maturity and sophistication for the concept to be viable.

Challenges and opportunities

This is not just due to the need for key decision makers within businesses to have sufficient levels of knowledge and understanding about the concept but also government and regulatory officials who set policy. For example, insurance legislation is some emerging markets, such as Brazil, is still very domestically focused such that it is not possible to insure risks within the country from an international insurance company.

In other countries, such as China, the insurance law doesn't differentiate between types of insurers and therefore the capital requirements are particularly onerous for even domestic captives. That is the major reason why it was only at the end of last year that the first Chinese onshore captive was formed (following one being established in Hong Kong in 2000 and where another was licensed last year).

In addition, it is also necessary to consider any other barriers to entry, for example black lists, and what might need to be done to overcome them, whether that is simply building better relationships between governments, regulators and tax authorities or entering into formal agreements such as a Memorandum of Understanding or a Tax Information Exchange Agreement.

It might also be considered whether a Double Taxation Agreement will help facilitate business between two jurisdictions. The point is that there are emerging market jurisdictions which are more sophisticated and more open in allowing risks to be written internationally and clearly these present the most obvious opportunities in the short term. For example, Guernsey already plays host to captives from parent firms based in the Middle East (e.g. Saudi Arabia), Africa (e.g. South Africa), Latin America (e.g. Colombia) and Asia (e.g. Singapore).

However, there are also those opportunities which are less immediate and will require a longer term commitment, especially in terms of education. Indeed, it is likely that captive managers seeking business from these markets may need to work closely with their home government, regulatory, tax and industry officials as a way to educate not just businesses within emerging economies but also their equivalent domestic authorities.

Long term game

It is critically important to research the different markets so that at least an educated decision can be made about the challenges that need to be overcome and the opportunities that exist within each emerging economy and as such, which offer the best prospects.

These should then be explored in a targeted manner to ensure that the best opportunities are prioritised and maximised rather than spreading efforts too thinly and not achieving results. There may be a long road ahead in some instances, but we are already seeing that Bermuda has specifically targeted Latin America, with some success and another Bermudian captive has recently been established to insure catastrophe risk in Africa.

Guernsey has also been active within emerging markets and we believe that the outlook is positive because our educational work is generating increased interest in the captive concept. For example, as part of the pilot Shanghai free trade zone, the China Insurance Regulatory Commission is now considering introducing more flexible regulation, including potentially lower capital requirements for companies in the zone.

If this is able to be applied to captives then it may be that in the future we will be able to work with the Chinese authorities to help them establish a sustainable regulatory regime.

On the one hand this would be a positive development in that it would signal a growing understanding of the captive concept in China, but having specific domestic captive legislation would theoretically provide a barrier to entry for the traditional captive domiciles.

However, what we envisage is that Chinese firms will insure their local risks in a domestic captive but then once they have become more comfortable with the concept, as they expand internationally and as they understand the need to manage risk effectively, then it would make sense to establish a vehicle in Guernsey to cover their global risk base (ex-Asia). This would be in a similar vein to the way large US multinationals often have a captive on that side of the Atlantic for their US risks and another in Europe for their rest-of world risks.

The point is that internationally expanding firms from emerging markets globally cannot just rely on a domestic captive regime (if it exists) to cover their global risks because there will simply not be the experience and expertise that is on offer from a jurisdiction such as Guernsey where the first captive was established in 1922.

Conclusion

As this year's Marsh captive benchmarking report also highlighted, captives are not established for tax reasons but because they form part of an effective risk management programme.

If firms from the emerging markets are to manage their global risks effectively then they need to ensure that they establish a captive which has sufficient substance to perform its true role and these vehicles are only going to be available from more established domiciles.

It is therefore down to captive managers to research and seek out business from these emerging markets, educating businesses from those regions as to the reasons to form a captive and it may also require local government involvement if reciprocal agreements would benefit such business flows.

Whilst some markets will take longer than others to convert, the ultimate benefits should more than justify the initial investment.

An original version of this article appeared in Captive Review, June 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
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
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