Guernsey: Guernsey – The Natural Reinsurance Alternative To Bermuda

Originally published in International Reinsurance Review 2007-2008, November 2007.

Guernsey is a world-class finance centre with a long established and well-resourced international insurance industry that is ideally placed to become home to reinsurance operations, particularly where they find Bermudas continued success in this field is placing significant pressure on its infrastructure and therefore, amongst other things, resulting in escalating and possibly prohibitive operating costs.

Growth In Bermuda

Bermuda is a colossus in the international (re)insurance industry, indeed, it has been referred to as "the worlds risk capital."¹ It remains the number one in the world in terms of the number of captives, with 869 domiciled writing gross premiums in excess of US$19bn and a major player in the global insurance/reinsurance market of which there are 443 such companies writing gross premiums of more than US$81bn.² Bermudas reinsurance industry has tripled in size from US$9.2bn in 2001 to US$28bn in 2005,³ with its worldwide market share increasing from 4.5% in 1999 to an estimated 9.8% in 2005.⁴ In 2006, (although "the Bermuda market is a mere baby compared to that of London") it outpaced its more illustrious transatlantic counterpart by nearly 10-1 as the domicile of choice for new share capital entering the reinsurance market.⁵

The Cost Of Success

From the perspective that Bermuda is a fellow offshore jurisdiction, it is encouraging to see such growth. However, as in all walks of life, continued success does create problems and in Bermudas case this is the significant pressure being (increasingly) placed on its infrastructure that is resulting in, amongst other things, escalating and possibly prohibitive operating costs. Guernsey, with a thriving finance industry, 24 square miles in size and with a population of 60,000, is not in a dissimilar position to Bermuda, which has an area of 20.75 square miles and 65,000 inhabitants. At just a glance though we can see how the various strengths of these forces at play and the way they are being managed is affecting their relative competitive positions in terms of proving an attractive location for establishing a reinsurance operation (including recruiting suitable employees):

• Both operate a permit or licensing system as a way of monitoring and controlling the population, although in Bermuda it is linked to work⁶ and in Guernsey it is tied to housing which relatively gives employers slightly more flexibility in recruiting staff. In addition, while in both systems the permits or licences expire (their length can vary and they can be extended) if you have to relocate back to the UK and continental Europe then it is much easier from Guernsey, which is 60 miles from England and 25 from France and with regular air and sea links to both. (This also applies to keeping in touch with family while based in the locations).

• Bermudas cost of living is one of the highest in the world⁷ and which World Bank economists believe to be some 380% more than the USA and 220% than in the UK.⁸ The cost of living in Guernsey is comparable to London.

• Most employers in Bermuda offer a housing allowance to employees because of the costs involved. Buying a stand-alone home in Bermuda is in the main too expensive because while the average price is US$1.6mn,⁹ this includes those only available to Bermudian citizens, with those available for non-Bermudians ranging from between US$3.5mn to US$20mn and neither include the 22% licence fee that non-Bermudians must pay on purchasing.¹⁰ In Guernsey the average cost is the equivalent of US$600,000.¹¹ Renting a two-bedroom, two-bathroom apartment or cottage in Bermuda costs on average US$4,750 per month¹² but the equivalent in Guernsey is around US$2,200.¹³

• In Bermuda the number of cars is limited to one per household, while in Guernsey there are no restrictions.

Bermuda is the benchmark offshore reinsurance jurisdiction and yet its continued success is (increasingly) putting it at a competitive disadvantage compared to Guernsey. In addition, as can be seen from the table at the foot of this sheet, Guernsey scores very well against Bermuda in a more general comparison of the jurisdictions as locations for establishing reinsurance operations. Indeed, Guernsey with a distinct environment and a world class finance centre with a leading international insurance industry, innovative legislation, pragmatic regulation, no taxation of international insurance and reinsurance companies and a rapidly expanding capital market has much to offer as a location for establishing a reinsurance operation.

The Right Environment

Guernsey is a British Crown Dependency, which means the Islands links to the United Kingdom are through the Crown rather than the British parliament. Guernsey has over 800 years of self-government it is legislatively and fiscally independent of the UK and has its own democratically elected parliament, The States of Guernsey. The Islands parliament has and continues to deliver political and economic stability on which business can rely and means the Island can and does respond quickly to the needs of business.

The Island has a special relationship with the European Union, which means that the Island is within the Common Customs Area and the Common External Tariff (i.e. it enjoys access to EEC countries of physical exports without tariff barriers) but other EU directives, including insurance/reinsurance measures, do not apply unless voluntarily accepted.

Conducting business in Guernsey is also made easy because the Island is English speaking; uses the British pound (Sterling); is in the same time zone as the UK, which means there can be interaction with both the Americas and the Middle East during one working day; is situated in an area with a temperate climate (and no exposure to natural disasters); and is located close to both the UK and continental Europe, with daily air links to both London and Paris.

World Class Finance Centre

These unique characteristics have helped Guernsey establish and maintain a thriving and broad-based finance centre that comprises not just a leading international insurance industry which in Bermuda is very much the sole powerhouse of the finance industry but also:

Banking 50 licensed banks holding deposits of US$210bn (up 23% year on year);

Investment funds Assets under administration and management of US$310bn (up 35% year on year);

Fiduciary and trusts Some 140 licensed companies with assets in trust of US$400bn

Channel Islands Stock Exchange (CISX) Established in Guernsey, the exchange is recognised in both London and New York and offers a cost-effective platform for listings, of which there are now more than 2,000.

Alongside has grown a comprehensive network of complementary services, including actuarial, legal, accounting, audit and tax advisers.

(Re)Insurance Expertise

Guernsey is a leading jurisdiction for insurance. Subsidiaries of major companies such as AIG, Aon, Catlin, Converium, Generali, Heath Lambert, Hiscox, Jardine Lloyd Thompson, Marsh, Old Mutual, Royal & SunAlliance and Willis all have operations in the Island. The Island writes a wide range of business and has a thriving international life assurance sector, although it is captive insurance for which the Island is renowned. Approximately 40% of the top 100 companies on the London stock exchange have captives in Guernsey and the Island also plays host to captives with parents from across the globe.

Since the first captive insurance company in Guernsey was formed in 1922 the Island has become Europes leading captive insurance domicile, with over 600 captive entities and amongst the top four in the world in terms of premiums written.

It has been calculated that of the US$6.5bn of international insurance premiums written on the Island annually, just under US$1.3bn is life assurance and employee benefit business and a majority percentage of the remaining $US5.2bn is inwards captive reinsurance. Guernsey vehicles therefore already write a considerable amount of reinsurance but through captives rather than as pure market reinsurance.

There are clearly opportunities to expand the extensive captive and niche insurance company management operations by introducing significant reinsurance vehicles to Guernseys insurance market, either as independent entities or as subsidiaries of major international players. They could operate with their own staff or perhaps more economically as managed entities. The Island already has the skills and experience to administer the latter having successfully used the managed model in both the banking and captive sectors.

Indeed, Bermudas more recent growth has been driven by the increasing use of sidecars essentially allowing an investor to attach to an existing reinsurance writer to provide capacity.¹⁴ It led the way with this innovative concept and has therefore attracted significant business off the back of having the template in place. However, there is no reason why this cannot be replicated in Guernsey, where there is not just insurance expertise but high quality support services such as legal advice.

Innovative Legislation

Guernsey can say it was, in 1997, the first jurisdiction to introduce the protected cell company (PCC). At the end of that year there were six PCCs and 14 cells but by the end of 2007 this had risen to 69 PCCs and 257 cells. Guernsey is always mindful to ensure that legislation is as up to date as possible and amendments have now been made so that PCC vehicles can transact insurance, reinsurance and investment contracts from one cell. They can be used for securitisation and swaps requiring insurance and other derivative business.

In May 2006, the Island also introduced the innovative Incorporated Cell Company (ICC) concept, (a sibling of the PCC) and the first insurance-writing ICC in Guernsey had come on-stream by the end of that year. This offers another alternative form for those wishing to structure deals on the Island.

Guernsey can also boast that on the one hand, it is a jurisdiction with mature insurance legislation it was, 22 years ago, one of the first to introduce a regulatory regime for captives and on the other, modern insurance law it has been reviewed this year and most immediately preceding that, in 2002.

The Guernsey law does not distinguish between insurance and reinsurance activities. This differs from the Bermudian Law, which categorises businesses into classes I and IV and imposes differing levels of regulation and capital requirements accordingly. This should not be seen as an impediment to Guernsey developing an offshore reinsurance business. Rather, it allows the regulator to be flexible and to consider each licence application on its merits instead of being constrained by the law. Some of the reinsurance activity that Bermuda has seen in 2005 and 2006 has been in the form where the vehicles utilised have been fully collateralised and so the issue of regulatory capital requirements fall away in any event.

Endorsed Regulation

Guernsey has an independent regulator, the Guernsey Financial Services Commission (GFSC), which has grown a reputation for robust yet pragmatic regulation. The Islands regulatory framework has been scrutinised and endorsed by external agencies such as the Financial Action Task Force (FATF) and the International Monetary Fund (IMF). The latter, for example, judged Guernsey to have a high level of compliance with international standards for the regulation of banking, insurance, securities, trust and company services, anti-money laundering and combating the financing of terrorism. The Commission is also keen to promote innovation, with the PCC an obvious example. In addition, the GFSC is at the forefront of regulatory developments, as demonstrated by the fact it represents Guernsey on the Executive Committee of the International Association of Insurance Supervisors (IAIS) and has been asked to Chair a sub-group that is producing a guidance paper on the supervision of captives as a way of informing and educating fellow IAIS members who are less familiar with the concept.

Zero Rate Of Tax

Insurance is recognised as being an important contributor to the Guernsey economy and as such all insurance and reinsurance companies are included within the Islands policy of levying a 0% rate income tax on corporate entities. Guernsey-resident shareholders are taxed on distributed company profits only. In terms of personal taxation, Guernsey residents will continue to be taxed at 20% on assessable income (with allowances) but this will be limited to a maximum contribution of £250,000. There remains no VAT in Guernsey. There has also been a commitment NOT to introduce wealth taxes like inheritance tax or capital gains tax.

Capital Flows

As previously mentioned, reinsurance capital has flowed into Bermuda in recent years.¹⁵ Of course, much of it is US capital chasing opportunistic premium for mainly US exposures, e.g. the Gulf of Mexico and Florida windstorm, and while there is no real reason why Guernsey could not attract such business, Bermuda is the jurisdiction of choice because while it is familiar and trusted (something which Guernsey could over time negate), it is also relatively near for US investors (and that is not going to change).

However, those funds available in the likes of London, Paris, Frankfurt and Zurich, as well as those on its doorstep, collectively represent a massive pool of untapped capital. Indeed, as has been shown, Guernsey already has a thriving international investments market, including a stock exchange.

Given that the Island is just an hour or so away by air, why is it that the London/Lloyds (re)insurance market, which can compete both in size and in expertise with Bermuda, does not already make use of Guernsey to raise new capital and establish innovative vehicles to bring that capacity to bear? All the ingredients are in place, including the legislation to facilitate the types of transactions currently being conducted in Bermuda, i.e. sidecars, catastrophe bonds and using PCCs as transformers.

The conclusion must be that London/Lloyds and for that matter the other European (re)insurance markets do not realise the Islands capabilities. That is why GuernseyFinance the promotional agency for the Islands finance industry, the Guernsey Financial Services Commission (GFSC) and the industry are coming together to better communicate the reinsurance opportunities that are available in Guernsey.

Guernseys Ready

Guernsey scores very well against Bermuda in a comparison of the jurisdictions as locations for establishing reinsurance operations. There is no doubt that Guernsey with an attractive environment and a world class finance centre with a leading international insurance industry, innovative legislation, pragmatic regulation, no taxation of international insurance and reinsurance companies and a rapidly expanding capital market is ready to become home to reinsurance operations.

Feature	Bermuda	Guernsey
Independent government	Yes	Yes
Stable government	Yes self-governing	Yes self-governing
Political parties	Yes	No
Attractive corporate tax regime	Yes zero corporation tax; payroll tax applies at 13.5%	Yes zero corporation tax; no payroll tax
Personal taxes	None	20% on salary with allowances
Sales tax	Yes	No sales tax and no VAT
Exchange controls	No own currency on par with US$	No own currency on par with sterling
Good-quality and flexible regulation	Yes	Yes
Internationally acceptable	Yes	Yes
Capable and professional insurance sector	Yes	Yes
Strong and appropriate support services	Yes	Yes
Ability for key staff to move to the Island	Yes requires approval of immigration department, exceptionally difficult	Yes requires approval of the housing department
Large expatriate community	Yes	Yes
Spouses able to work	Often difficult	Yes
Housing	Rental sector only during period of work permit; London rates++	Purchase or rental during period of housing licence; London rates and prices
Quality schooling and places available	Can be difficult to secure places	Yes
Senior schools for 15 years+	No boarding in US or UK required	Yes including A-levels, then to UK
Proximity to major insurance markets	Yes US	Yes London Europe
Proximity to major investment markets	Yes US	Yes London EU, Zurich plus Guernsey and Jersey funds
Insurance company law modern/appropriate	Yes	Yes
Island exposed to natural catastrophe perils	Yes hurricane	None
Single source of power on Island	Yes	No: own-power generation plus cable link to European Grid
Communications	Satellite plus cable link to US	Satellite plus cable links to UK and France
Flights	Daily to US	Daily to UK
Ferries	None	Daily to UK and France

Footnotes

^{1 Association of Bermuda Insurers and Reinsurers, www.abir.com.}

^{2 These statistics are for the year ended 31 December 2005 the latest available from the Bermuda Monetary Authority, www.bma.bm.}

^{3 Bermuda composite reinsurance P/C gross premiums written, Guy Carpenter, Bermuda Reinsurance Market: After Record Storms, Capital Fills Sails, pp.1-2.}

^{4 Bermuda market share net reinsurance premiums written, Guy Carpenter, Bermuda Reinsurance Market: After Record Storms, Capital Fills Sails, p.3.}

^{5 Adrian Beasley (Attorney on the Insurance Team within the Corporate/Commercial Practice Group at Appleby), Bermuda Reinsurance Charting The Growth Cycle, 14 May 2007.}

^{6 The Downside of Working in Bermuda, www.bermuda4u.com .}

^{7 Keith Archibald Forbes, Bermuda Cost Of Living Guide, www.bermuda-online.org and taken from Mercer Human Resource Consulting.}

^{8 Keith Archibald Forbes, Bermuda Cost Of Living Guide, www.bermuda-online.org .}

^{9 Keith Archibald Forbes, Homes, Condominiums & Apartments, www.bermuda-online.org .}

^{10 The Acquisition Of Property In Bermuda By Overseas Purchasers, www.property-group.com .}

^{11 States of Guernsey Policy Council, Guernsey Residential Property Prices Quarter 1, March 2007.}

^{12 Keith Archibald Forbes, Bermuda Cost Of Living Guide, www.bermuda-online.org .}

^{13 States of Guernsey, Census 2001, reflated to 2007 prices and also averaged with a comparison of current estate agent prices.}

^{14 Guy Carpenter, Bermuda Reinsurance Market: After Record Storms, Capital Fills Sails, p.4 and Adrian Beasley (Attorney on the Insurance Team within the Corporate/Commercial Practice Group at Appleby), Bermuda Reinsurance Charting The Growth Cycle, 14 May 2007.}

^{15 Guy Carpenter, Bermuda Reinsurance Market: After Record Storms, Capital Fills Sails, p.13.}

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.