Originally published in Strategic Risk, Captive
Management, A guide to European captive domiciles and company
strategies, March 2009
Updating solvency frameworks has become essential for
captive domiciles in the light of Solvency II. Richard Walker,
Director of Policy and International Affairs at the Guernsey
Financial Services Commission (GFSC), describes Guernsey's
Failures and near-failures in the global insurance market during
2008 have raised questions about international regulatory standards
and in Europe have placed greater focus on the proposed Solvency II
regime. As a result, Guernsey has updated its solvency
Last year the Guernsey Financial Services Commission (GFSC)
augmented the existing risk based approach to supervision with the
introduction of the 'own solvency capital assessment'
(OSCA). This requires licensed insurers to justify their view of an
appropriate solvency margin requirement, subject to an absolute
minimum level calculated in accordance with the law. We believe
that this provides a vigorous regulatory regime which affords the
right environment for the continuing successful development of the
island's international insurance industry in 2009 and
Mature yet modern
It is now 23 years since Guernsey's original insurance
legislation was introduced. The island was one of the first
jurisdictions to introduce a regulatory regime for captives.
Just over 10 years later came one of Guernsey's great
success stories when it pioneered the protected cell company (PCC)
concept. Further legislation was introduced in 2006 to provide for
incorporated cell companies (ICCs). There are now more than 70 PCCs
and ICCs and more than 350 insurance cells in Guernsey, including
the first insurance-writing incorporated cells.
The primary regulatory law, the Insurance Business (Bailiwick of
Guernsey Law), 2002, is supplemented by codes and regulations. Some
of these were amended with effect from March 2008. The amendments
followed a period of extensive consultation with the insurance
The GFSC has put in place 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 GFSC's director of insurance
chaired the IAIS captive guidance paper drafting group, which was
formed in 2007 to prepare a guidance paper on the supervision of
captives. This paper was adopted at the IAIS annual general meeting
in October 2008.
Guernsey has been selected as a member of a task force which is
reviewing the ICPs and is chair of the market conduct subcommittee.
The commission is also involved in the following IAIS
subcommittees: insurance laws; regional coordination; reinsurance;
solvency and actuarial issues; accounting; insurance groups, and
governance and compliance.
The GFSC has used a risk based approach to supervision for many
years. A risk rating is currently 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
enhanced supervision may be required.
The EU's Solvency II Framework Directive proposal
establishes the proportionality principle as a general principle
that applies throughout the directive. Having implemented a risk
based solvency requirement that is proportionate to the Guernsey
insurance sector, the GFSC will explore the possibility of agreeing
a mutual recognition treaty between Guernsey and the EU. Such a
treaty would help Guernsey captive insurers use EU insurers to
front their business, as it would enable the EU insurers to take
account of reinsurance placed with the captive for solvency
2009 and beyond
The introduction of the OSCA is very much seen as part of the
Guernsey package that will enable the island to maintain its lead
in the regulation of captive insurance while allowing captives and
other types of business, such as reinsurance, to develop. As
regulators our role includes keeping pace with these developments
and maintaining Guernsey's reputation as an insurance
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