1 January 2016 will see the EU's Solvency II Directive come
into full effect, with requirements for EU insurers to comply with
its three pillars on capital and solvency; governance and
supervision; and disclosure and transparency of information.
Guernsey and Jersey are outside the EU and are therefore not
subject to Solvency II. So what are the alternatives that the
Channel Islands offer to (re)insurers?
THE GUERNSEY OFFERING
Guernsey took an early stance in 2011 not to seek equivalence
under Solvency II. This decisive approach was welcomed by industry
against a backdrop of uncertainty created by the delays associated
with Solvency II. Guernsey took this decision because Solvency II
does not distinguish between different types of insurer and the
levels of capital they have to hold, and would therefore place an
inappropriately large capital burden on captives, which constitute
the major part of Guernsey's insurance industry. It would also
be unsuitable for the large numbers of special purpose insurers in
Guernsey in the alternative risk transfer space, including issuers
of insurance linked securities. Instead Guernsey has committed to
fully complying with the Insurance Core Principles of the
International Association of Insurance Supervisors
(IAIS) in the areas of solvency, corporate
governance and public disclosure.
As a result, in May 2015 Guernsey introduced a new solvency
regime under the Insurance Business (Solvency) Rules 2015
(Solvency Rules). The general rule is that a
Guernsey licensed (re)insurer must hold capital resources in
accordance with three levels: the Minimum Capital Requirement
(MCR); the Prescribed Capital Requirement (PCR)
and the Capital Floor. The Guernsey Financial Services Commission
(GFSC) maintains a discretion to modify these
requirements on a case by case basis.
The Capital Floor is £100,000 for general business and
£250,000 for long term business; for protected cell companies
(PCCs) the Capital Floor only applies to the
overall PCC, not to individual cells or the core of the PCC.
For general (re)insurers the MCR is the higher of (a) 12% of
gross written premiums net of certain amounts including premium
taxes, rebates, commissions and certain reinsurance premiums; (b)
12% of claims reserves and premium reserves, net of reinsurance and
amounts reserved to maximum; and (c) the Capital Floor. For life
business the MCR is the higher of (a) 2.5% of total reserves, net
of reinsurance; and (b) the Capital Floor.
The PCR is the capital required to ensure that the (re)insurer
should be able to meet its obligations over the next 12 months with
a prescribed confidence level of 99.5% for Commercial Life/General
Insurers; 97.5% for Commercial Life/General Reinsurers; and 90% for
There is no MCR or PCR for Category 6 (re)insurers –
special purpose entities including ILS cells and fully funded
This is clearly very attractive for captives, which only have to
hold capital equating to 90% value at risk compared to 99.5% under
Solvency II, and for special purpose entities, which are exempt
from the Solvency Rules altogether.
Guernsey's regime is also less prescriptive than Solvency II
on capital assessment procedures and provides an exemption from
public disclosure rules for captives.
THE JERSEY OFFERING
The Jersey Financial Services Commission (the
Commission) sought early input on Solvency II from
those in the insurance sector in Jersey who would be affected by
changes to regulatory capital requirements applied in the island.
This dialogue, the Commission said, did not identify any regulatory
or other reason for implementing Solvency II in Jersey.
Jersey therefore, has chosen not to follow Solvency II (opting
for "non-equivalence"). Whilst the Commission will
continue to monitor the development of Solvency II, Jersey will
focus on following the international standards set by the
International Association of Insurance Supervisors
(IAIS). It is these standards against which Jersey
has previously been assessed by the International Monetary
The solvency margin requirements for Category B permit holders*
in Jersey are 17.5% of net premium income for general business, and
2.5% of the value of the long-term insurance fund required to be
maintained by the Permit holder or £50,000, whichever is the
greater, for long-term business. An initial capitalization of
£100,000 is usually required; but the Commission has the
ability to amend this, both upwards and downwards, should it feel
that this amount is inappropriate in the circumstances of the
permit holder's business.
Article first published in Business Brief, Issue 323,
* A Category B permit is required by a person who carries on insurance business in or from within Jersey and who is not authorized by another jurisdiction to carry on such business lawfully in that jurisdiction
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