Guernsey: Europe's Number One Captive Domicile

Last Updated: 14 June 2016
Article by Dominic Wheatley

Most Read Contributor in Guernsey, September 2018

Dominic Wheatley, chief executive of Guernsey Finance, discusses how insurance milestones underline Guernsey's expanded offering.

Confirmation that Guernsey ended last year with more than 800 international insurers was a terrific endorsement of our standing and expertise across the insurance sector.

Figures from the Guernsey Financial Services Commission (GFSC) show that there were 804 international insurers licensed in Guernsey at the end of December 2015, made up of 242 limited companies, 64 protected cell companies (PCCs), 444 PCC cells, 13 incorporated cell companies (ICCs) and 41 ICC cells. It was the first time Guernsey has ended a year above the 800 threshold.

Our position as the number one captive insurance domicile in Europe is well-known, but our offering in recent years has expanded and evolved far beyond the tried-and-tested concept of creating a wholly owned subsidiary to provide insurance to its non-insurance parent company. That's not to say this work is still not taking place, but our expertise is now being utilised in a number of different ways to meet a variety of risk management needs.

Longevity risk

Indeed, Guernsey has utilised its captive insurance expertise to become the go-to jurisdiction for offering solutions to longevity risk – a risk faced by many pension funds and insurance companies because people are living longer than expected which in turns leads to higher than expected pay-out-ratios. Guernsey made its name in this area when the BT Pension Scheme, Britain's largest corporate pension fund, structured its record-breaking £16bn longevity risk transfer with the Prudential Insurance Company of America through Guernsey. The deal saw the trustees of the scheme set up their own captive insurance company, and then reinsure its longevity risk with Prudential. In the biggest deal of its kind, the arrangement covered 25% of the scheme's exposure to increased life expectancy and amounted to £16bn of the scheme's liabilities.

At a masterclass in London in October, John Coles, head of operation for the BT Pension Scheme, extolled the virtues of working with Guernsey on the deal. He emphasised the expertise and experience present within Guernsey's insurance community and how our risk-based regulatory approach meant that the challenges involved in such a large transaction were reduced.

"It was important for the trustees that they felt comfortable with the jurisdiction and Guernsey certainly meets that. Guernsey has a good legal framework and a good regulatory environment," said Mr Coles. He added that the island was clearly open for quality business and its utilisation of the ICC structure was the most appropriate and practical way of meeting the needs of the transaction.

"The regulator and all of the companies in Guernsey recognise the business activity. They understand the risks and that is very helpful. From our particular experience, we have met and now use a number of very experienced and talented people with both insurance and captive knowledge and they have been very adaptable and flexible in helping us to land what was quite an innovative transaction for the scheme – to actually create its own captive, certainly in a transaction of this size."

In a similar fashion to BT, leading global professional services company Towers Watson subsequently launched Towers Watson Longevity Direct, a service which enables other pension schemes to gain direct access to the reinsurance market in order to hedge longevity risk for their defined benefit liabilities. This is done by owning a ready-made insurance cell that can write insurance and reinsurance contracts for longevity swap transactions. The structure significantly reduces the cost of hedging longevity risk for pension schemes by removing the need for an intermediary insurer to write the transaction. It also means bigger transactions can be completed and the best reinsurance pricing can be accessed.

At the same October event, pensions funding expert Ian Aley, who heads the transactions team at Towers Watson, said the use of captives was an efficient means of dealing with the risks associated with large pension schemes. He explained that, while cost was a key factor behind using a captive, the fact that a captive allowed pension schemes to maintain control by facilitating a 'principal-to-principal' approach with the removal of third parties in transactions was equally important.

"The appetite for longevity is in the reinsurance market, so you could use an insurer to take the risk and then pass it on, but they will have to apply capital to that risk, even though they are not writing the risk. If you use a captive offshore, such as Guernsey, the capital regime is different and there is a greater level of relief for reinsurance," said Mr Aley. The capital that is applied to the captive you can think of in terms of a liquidity issue rather than paying someone else capital. So you still own the captive; you still own that capital. You're not going to be able to use it for many years, but it's still there. So, there's a reason of cost. The second reason for me is if you are transacting with a reinsurer directly through the captive, you are able to have a principal-to-principal discussion, rather than have a third-party influence the documentation and the terms of the contract. Therefore, it better suits the needs of both parties."

Track record

Both the BT and Towers Watson deals represent another feather in the cap for Guernsey's captive insurance offering and expertise. What they demonstrate is that companies and industries looking for solutions appreciate the expertise we've built up over many years as an experienced, innovative and professional risk management sector. It all started back in 1922 when the first captive was established in Guernsey, while today, the island is home to the major multinational captive insurance managers and independent providers.

Together, they service more than 800 licensed international insurance entities, including captives from major companies such as BP, BHP Billiton, Next, Marks & Spencer and Tesco, as well as UK government-related organisations – for example, Network Rail and Transport for London.

Guernsey's strength is underlined by the fact that approximately 40% of the leading 100 companies on the London Stock Exchange with captives have them domiciled in Guernsey. 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, with firms from across Europe, the US, South Africa, Australia, Asia, the Middle East and the Caribbean all having established captives in the island.

Commercial reinsurance

Furthermore, Guernsey is building its appeal as a jurisdiction for commercial reinsurance companies.

Kelvin Re became the first independent rated commercial reinsurer to be based in Guernsey when it was announced at the end of 2014 that the privately owned start-up company would be using management services provided by Aon Insurance Managers (Guernsey). Providing short-tail property and specialty lines reinsurance, the company planned to build a $100m book of business in its first year of which around two-thirds would be non-proportional catastrophe risks.

Kelvin Re was subsequently followed by the launch of Humboldt Re towards the end of last year. Launched by ILS investment manager Credit Suisse Insurance Linked Securities, the privately owned start-up entity is administered by Aon Insurance Managers (Guernsey) and provides mainly short-tail property and speciality lines reinsurance. With an initial capital outlay of CHF 500m, Humboldt Re intends to build a portfolio of approximately CHF 140m gross written premiums in its first year, with globally diversified reinsurance exposures focused on property catastrophe.

Solvency II

Catering for these clients means that Guernsey has not sought equivalence with Solvency II after careful consideration that the directive's requirements were not proportionate to the risk levels within many of the island's insurance and reinsurance vehicles.

Guernsey may geographically be in Europe, but it is not within the European Union (EU) and therefore is not required to implement its directives, including Solvency II. Instead, Guernsey continues to adhere to the insurance core principles of the International Association of Insurance Supervisors (IAIS), which provide proportionate regulation to the specialist insurance market.

As William Mason, director general of the GFSC and chairman of the Audit and Risk Committee of IAIS, explained recently: "Guernsey's insurance sector is focused on the international arena, not exclusively on the eurozone economy, which made Solvency II an unnecessary excess of regulatory pressure for the jurisdiction." It means that Guernsey has instead introduced its own risk-based solvency capital standard within the last 12 months and will carry on updating that as needed to match the IAIS' international capital standards. It is this consolidation of an innovative industry alongside intelligent regulation that is underpinning an environment in which captive insurance can flourish in assisting risk managers to enhance their insurance programmes.

GUERNSEY – THE KEY FACTS

Guernsey's heritage as an international insurance centre has helped build an infrastructure and expertise that is ideally suited to providing a range of alternative risk management solutions.

The following selection of facts and figures highlights Guernsey's position as one of the leading captive domiciles globally:

Vital statistics

  • Approximately 40% of the leading 100 companies on the London Stock Exchange with captives have them domiciled in Guernsey
  • In 1997, Guernsey introduced the Protected Cell Company (PCC) and has since also introduced the Incorporated Cell Company (ICC)
  • There were 66 international insurance licences issued during 2015. This helped push the net total number of international insurers licensed in Guernsey to 804 at the close of 2015

Value of business

  • The value of gross assets has increased markedly in recent years, reaching £23.7bn in 2014
  • The net worth of insurance business in Guernsey reached £11.6bn in 2014 – up 43% compared to five years previous
  • In 2014, premiums written were £4.9bn, which was a rise of £1bn on five years previous

Location of parents

  • New captives, PCCs, ICCs and cells licensed in Guernsey during 2015 were predominately established by UK and Cayman parent companies – 44% and 24% respectively
  • The number of new international insurance entities with an Ireland, Guernsey or US parent company stood at 8%, 7% and 7% respectively during 2015
  • The island still boasts a truly international insurance sector, illustrated by the fact that the spread of new business includes the UK, Europe and the US-Caribbean (US and Cayman). This is all in addition to existing business that is spread across these regions and beyond

Type of business

  • The range of business written over the 12 months to 31 December 2015 includes Insurance Linked Securities (ILS) (38%) and insurance lines covering property (14%), After the Event (ATE) legal expense (10%), general liability (7%) and longevity (4%)

An original version of this article was published by Captive Review, May 2016.

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.

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