Originally published in World Commerce Review, Volume 1 Issue 2, January 2008.
Both for you personally and your organisation there are potential benefits to be gained from using financial services in Guernsey.
Over the last four decades Guernsey has established itself as a leading international finance centre with the highest reputation and standards, providing an extensive range of products and services to a global market. The Islands mature, innovative and service-oriented financial services sector is based on a balanced range of providers, broadly comprising: insurance; banking; investment funds; and fiduciary services (trust and company administration).
Guernseys financial services industry offers you potential benefits, whether in the management of your personal wealth or covering your organisations risks.
How Your Organisation Can Benefit From Insurance In Guernsey
G uernseys international insurance industry provides a range of risk management solutions but is particularly renowned for its captive expertise.
Captive insurance is effectively self-insurance. In its purest form, it is where a company (the captive) is set up by its owners primarily to insure the risks of its parent (and/or subsidiaries). This can offer several advantages in comparison with insuring through the commercial market:
- The insuring of unusual or catastrophic risks or multiple small risks
- Premiums that relate to the insureds previous claims record
- Avoid subsidising large overheads and profit margins of commercial underwriters
- Direct access to the wholesale reinsurance market
- Benefit from the investment return on retained premiums
- Retention within the group of the excess of net premiums over claims
- Taxation efficiencies
- Improved risk management and understanding of the cost of risk
Many large public and international organisations have assessed how these potential advantages apply to their operations in practice and subsequently abandoned the commercial market in favour of establishing a captive.
However, small to medium sized enterprises have found that the benefits of a captive, given the likely volume of business, can be outweighed by the start-up and on-going costs. Participating in a rent-a-captive scheme offers the advantage of sharing those expenses but firms are cautious about doing so in a conventional company, where all of the assets and liabilities are linked and thereby risk that the failure of one insurance programme will lead to the loss of assets relating to another.
In response, Guernsey pioneered the Protected Cell Company (PCC) a company made up of a core and individual cells, where the legal segregation ensures that no claim against one cell will be covered by the assets within another. Several jurisdictions, including Guernsey, have also now introduced the Incorporated Cell Company (ICC). An ICC, like a PCC, has cells but they are separately incorporated and distinct legal entities, offering an added layer of protection in the separation of assets and liabilities.
The use of a third-party cell company rather than a full-blown captive has distinct benefits which for SMEs, in particular, makes captive insurance far more viable:
- Savings from reduced reporting requirements and shared costs
- Reduction in the amount of executive time required by the cell owner
- Quicker and cheaper to set up and exit due to different legal processes
- Need to cover the minimum margin of solvency and the risk gap but this may be less than the £100,000 minimum required for a separate captive
- Using a PCC can reduce the tax burden, for example in the UK it is possible to avoid being subject to Controlled Foreign Company legislation
There is growing recognition of the benefits of captive insurance, as evidenced by the continuing rise across the globe in the number of captive, PCC/ICC and cell formations.1 However, in the words of Andrew Tunnicliffe, Group Managing Director, Business Development, Aon Global Risk Consulting: "there is still a long way to go before companies are truly managing risk effectively...you are missing out on significant cost savings by not using captives as part of your risk management programme."2 Such are the potential benefits of captive insurance for all sizes of organisation that an insureds risk management strategy could be considered somewhat deficient in scope and responsibility if it does not involve the use (or at least consideration) of some form of captive insurance.
Many jurisdictions around the world offer captive insurance, including the use of the cell company.
However, it is Guernsey which can boast the richest heritage in these areas: since the first captive was established in Guernsey in 1922, the Island has grown to become the leading jurisdiction in Europe for captive insurance and number four in the world in terms of premiums written; and in 1997 Guernsey pioneered the cell company with the innovation of the PCC and this has since been followed by the introduction of the ICC.
This experience means Guernsey has accumulated a great wealth of related expertise. The Island now plays host to captive managers ranging from small boutique operations to large international players and independent captive managers through to broker-tied managers. They manage captives with parents from around the world, although it is from the UK where the majority of business is derived. Approximately 40% of the FTSE 100 companies have captives in Guernsey and a report published in March 2007 by Marsh showed that 50% of the captives established by UK companies are based in Guernsey.3
Captive insurance provides your organisation with an opportunity to benefit from the financial services that are on offer in Guernsey. But what potential benefits are there for you as an individual?
How You As An Individual Can Benefit From Financial Services In Guernsey
P rivate clients can benefit from the Islands excellence in wealth management banking, investment funds and fiduciary services.
Banks have played a key role in the development of Guernsey as a top tier international finance centre. The first bank to be established on the Island was the Guernsey Savings Bank, which was founded in 1822. However, banking in Guernsey was purely domestic and largely conducted by the major British high street clearing banks until the mid-1960s when a clutch of merchant banks established subsidiary operations in the Island to relay the benefits of offshore banking to their international clients.
Today, there are 50 licensed banks in the Island with deposits of more than £112bn up 26% year on year. Products range from retail banking and savings through international wealth management to institutional business and specialist lending. This includes servicing the other financial services sectors on the Island.
Banks do not deduct interest at source so taxpayers can defer their tax payable on interest earned until the end of the year. Interest earned on Guernsey accounts should be declared to the tax authorities where the depositor is resident for tax.
Banks in Guernsey have continued to perform strongly despite the turbulence in the global markets, something which is also true of the Islands investment funds sector.
The value of funds under management and administration is now in excess of £164bn an increase of 36% during the year. The sector is benefitting from a series of changes that have made it quicker and simpler to conduct business in the Island.
Guernsey plays host to a range of investment businesses including investment advisers, stockbrokers, and a significant number of fund managers, custodians and administrators, who in combination offer a range of products and services for both retail and institutional investors from the general to the more specialised. In particular the Island is growing a reputation as a centre of excellence for alternative investments like funds of hedge funds, private equity and property, as well as more esoteric asset classes such as fine wine, fine art and timber.
Another area of expansion is the asset management sector. Subsidiaries of large groups as well as independent investment boutiques provide wealthy private clients, their advisers and the institutional marketplace with services, including stockbroking and dealing arrangements, for funds and discretionary investment management portfolios.
Guernsey is a leading international fiduciary centre with over 50 years experience of supplying trust and corporate services.
The Island plays host to some 140 licensed fiduciaries, ranging from large organisations to independent, boutique operations, holding more than £200bn of assets in trust. There is substantial expertise in using the innovative modern structures that are available on the Island for the preservation of both institutional and individual/family wealth and assets. In particular, Guernsey is growing an excellent reputation in the emerging niche market of the family office, where it can build on its track record of providing trust services for individuals and families.
Non-Guernsey income (and Guernsey bank interest) accruing to trusts that have no Guernsey beneficiary is not subject to Guernsey income tax.
Amendments to the Islands Trust Law, which include abolishing the personal liability of directors in Private Trust Companies (PTCs) and introducing Purpose Trusts, are expected to be introduced early in 2008. Work continues on the introduction of Foundations. Such changes ensure that providers based in Guernsey can continue to offer clients the very widest range of products and services.
The Islands already business-friendly environment is also being enhanced in other ways: on 1 January 2008, the Island will move to a standard zero rate of corporate tax (and there is already no withholding tax on dividends paid, no capital gains tax, no inheritance tax and no value added or general sales tax); a new Companies Law is set to come on-stream during 2008 it will introduce a streamlined company incorporation process that from the summer of 2008 will be facilitated by a modernised Company Registry; and also during 2008, a suite of IP-related legislation will continue to be introduced to the market.
Guernsey already boasts an independent stock exchange, the Channel Islands Stock Exchange (CISX) which has more than 2,000 listings; a bespoke professional development facility, the Guernsey Training Agency (GTA) University Centre, which ensures that the high standards of client service are maintained; a network of legal, accounting, tax, audit and actuarial advisers; and an independent regulator, the Guernsey Financial Services Commission (GFSC), with its robust yet pragmatic approach to regulation. Indeed, it is through scrutinisation and endorsement from third parties such as the International Monetary Fund and the Financial Action Task Force that Guernsey can justify its claim to be a well regulated and first-class international finance centre.
Whether the management of your personal wealth or covering your organisations risks, Guernseys financial services industry can offer you potential benefits.
Guernsey, situated 30 miles west of northern France and 70 miles south west of England, is 24 square miles in size and has a population of 60,000. The Island is a British Crown Dependency, with over 800 years of self-government. It is legislatively and fiscally independent of the United Kingdom and has its own democratically elected parliament, the States of Guernsey.
Guernsey also enjoys a special relationship with the European Union. Terms negotiated on the UKs accession to the EEC mean that the Bailiwick is within the Common Customs Area and the Common External Tariff; essentially it enjoys access to EU countries for physical exports without tariff barriers. Other rules and directives do not apply though, unless voluntarily accepted.
The Island is English speaking; uses British Pound Sterling; is in the same time as the UK; and is in close proximity to and has regular air links with London and Europe.
1 The Journal, the magazine of the Chartered Insurance Institute, reports in the October, 2007, article Capturing Interest that there are some 5,000 captives globally, writing more than $20bn in premium and with a capital and surplus at more than $50bn. Andrew Tunnicliffe, Group Managing Director, Business Development, Aon Global Risk Consulting says that the report, Global 1500: A Captive Insight 2007, published in summer 2007 by his firm, "shows that growth in the captive market is not slowing down." http://insight.aon.com/?elqPURLPage=612
2 Andrew Tunnicliffe, Group Managing Director, Business Development, Aon Global Risk Consulting, commenting on the report, Global 1500: A Captive Insight 2007, published in summer 2007 by his firm. http://insight.aon.com/?elqPURLPage=612 It notes that insurance buyers within the worlds largest companies are failing to achieve a better quality of cover as well as cost savings of typically 10-15%, through economies of scale, efficient use of capital, leverage and more efficient use of senior management time.
3 Fit for Purpose? Benchmarking the Continuing Contribution of Captives, from Marsh UK, March 2007.
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.