Originally published in the Captive Review, Guernsey Report, October 2008
Guernsey attracts a diverse range of insurance companies, building on its already world-renowned reputation for innovation, says Diane Colton of the Guernsey Financial Services Commission (GFSC)
Guernsey is world renowned as a centre for international insurance with an outstanding reputation for innovation and professionalism which has been built up over many years. The insurance industry in Guernsey has its origins in the 18th century and captive insurance companies have been incorporated here since 1922.
At the end of July 2008 there were over 700 insurance entities (including cells) licensed in Guernsey writing £3bn in insurance and reinsurance premiums. Approximately 40% of the UK FTSE 100 companies have captives in Guernsey.
Guernsey's great success story in recent years is the Protected Cell Company (PCC) which was pioneered in the island in 1997. There are now over 70 PCCs and almost 350 insurance cells in Guernsey and further legislation was introduced in 2006 to allow the Incorporated Cell Company (ICC).
Guernsey continues to see a diverse range of insurance companies being formed, from the traditional captive to large reinsurers.
Insurance regulation in Guernsey
The Guernsey Financial Services Commission's (GFSC) approach to insurance regulation is robust yet flexible and pragmatic, with a regulatory framework that operates to international standards and follows the Insurance Core Principles (ICPs) developed by the International Association of Insurance Supervisors (IAIS). It has a statutory duty to protect Guernsey's reputation as a financial centre and this is reflected in the approach to supervision. The GFSC plays a very active role in the work of the IAIS and is represented on the Executive Committee as well as the Technical and Implementation Committees.
The director of insurance chairs the IAIS Captive Guidance Paper Drafting Group, which was formed in 2007 to progress a guidance paper on the supervision of captives, and it is intended that this paper will be adopted at the IAIS annual general meeting in October 2008. Guernsey has been selected as a member of a task force which will review the ICPs during 2008 and is also chair of the Insurance Fraud Subcommittee. The GFSC is also involved in the following IAIS subcommittees: Insurance Laws, Regional Coordination, Reinsurance, Solvency & Actuarial Issues, Accounting, Insurance Groups and Governance & Compliance.
The risk-based approach to supervision, which is only now being formulated in Europe, has been the approach used by the GFSC for many years and has been instrumental in the growth of the insurance industry in the island since the GFSC was established in 1998. A risk rating is assigned to each company based on a set of standard criteria. This approach enables us to focus our resources on the areas of greatest risk and to identify where regulatory action may be required.
Guernsey is committed to keeping its laws and regulations up to date and relevant to the evolving insurance market and international requirements.
The Insurance Business Bailiwick of Guernsey Law 2002 (as amended) is supplemented by various codes and regulations all of which were amended with effect from March 2008. These amendments followed a period of extensive consultation with the insurance sector and will enable regulation in Guernsey to continue in an appropriate and efficient manner.
The Guernsey market
The Guernsey insurance sector is broadly divided into two main areas: domestic insurance and international insurance. These two areas of insurance business offer different services to their discrete target markets but benefit in common from the positive insurance environment that Guernsey provides.
International insurance embraces captive insurers, PCCs, ICCs and life insurance companies.
Captive insurance companies were originally established to write the insurance of the risks of the parent company, known as a pure captive. A captive may also write third-party business and there is the possibility that they become true commercial insurers depending on the level of third-party business.
PCCs were established in response to demand from companies who wished to take advantage of the captive approach to risk management but did not want to establish their own captive. They have proved of particular interest to the promoters of association captives and international groups involving numerous autonomous subsidiaries. PCCs are also used as Special Purpose Vehicles to facilitate either the transition of capital market transactions into insurance transactions or risk transfer conduits to enable securitisation of future income streams.
International life insurance companies form an important and significant part of the sector and there are a variety of companies licensed in Guernsey with a diverse size and spread of business. A number of these insurers write business for third country nationals including both investment-linked individual life assurance and pensions business. Group life and pensions are an increasingly important sector of the market.
Domestic insurance comprises local insurers, overseas insurers, recognised insurers and intermediaries. Local domestic insurers are incorporated in Guernsey writing primarily domestic business.
There are also a large number of overseas insurers licensed in Guernsey which write life and general business. If contracts of insurance are arranged directly for clients, either through a branch or agents, the insurer is deemed to have a physical presence in Guernsey and is required to be licensed by the GFSC.
Where an insurer wishes to carry on insurance business in Guernsey through licensed insurance intermediaries and does not maintain a physical presence in the island, that insurer is classed as a recognised insurer. All insurers licensed in the EEA are automatically considered as recognised insurers in Guernsey by law.
Licensed insurers must appoint a general representative, who may be either an executive director, resident employee or licensed insurance manager approved by the GFSC. The general representative is responsible for ensuring that the insurer complies with all applicable laws, regulations, codes and rules.
There are a significant number of insurance intermediaries operating in or from within Guernsey and the GFSC is keen to encourage high standards in this sector. Licensed intermediaries are restricted to offering policies only of recognised insurers and are subject to licensing and minimum levels of qualification.
In 2007, 64 new international insurance entities were licensed with just under 40% having UK parent companies and almost 30% being established for companies based in Europe. This illustrates the increasing international spread of business that is being attracted to Guernsey.
There have been a number of recent firsts for Guernsey, including:
- the world's first local authority captive for the Australian Gold Coast City Council which chose Guernsey after a rigorous selection process;
- the first major commercial reinsurer to be established in Guernsey, Barbican Reinsurance Company Limited, was incorporated and will be writing reinsurance of a new Lloyds syndicate;
- Guernsey's first pension insurer, Pension Security Insurance Corporation Limited, will participate in the UK bulk annuities market;
- the first incorporated cells in an ICC were licensed.
Local insurance managers have indicated that there is continued interest in forming captive insurers in Guernsey, especially in the small- to medium-enterprise market, where cells are a low cost alternative to a full captive insurance company. The island continues to maintain its position as Europe's leading domicile for captive insurance while encouraging other types of insurance business, such as reinsurance, to locate here.
The GFSC is closely following developments in Europe in respect of the proposed Solvency II regime which is scheduled to come into effect in 2012. It is not yet clear how this regime will impact upon the captive insurance market either for captives located inside or outside the EU.
Guernsey has recently introduced a more formalised risk-based capital assessment process, the OSCA (Own Solvency Capital Assessment). This requires licensed insurers to justify their own view of an appropriate solvency margin requirement subject to an absolute minimum level calculated in accordance with the law.
The Solvency II Framework Directive Proposal establishes the proportionality principle as a general principle that applies throughout the Directive. Therefore, having implemented a risk-based solvency requirement that is also proportionate to the Guernsey insurance sector, the GFSC is enthusiastic to negotiate a mutual recognition treaty between Guernsey and the EU.
For more information about Guernsey's finance industry please visit www.guernseyfinance.com.
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