The captive industry is seeing a growing trend for captive entities to forge relationships with partners who are already connected to their parent company. Gavin Parker, head of captive insurance at Barclays in Guernsey, argues that this approach has several benefits for all parties and that Guernsey is leading the way in establishing and promoting these multi-faceted relationships.
Guernsey remains a leading international financial centre, with strong expertise in the fiduciary, funds, investment and banking sectors, in addition to being Europe's largest captive insurance centre and the fourth largest globally.
A key part of Guernsey's success has been its proactivity in promoting the capabilities of the island and establishing strong long-term relationships with key business partners and introducers.
This theme of exploring and deepening relationships is no different in the captive sector. Increasingly we are seeing captives being established in the island where the establishing parent is interested in maintaining existing relationships and maximising efficiency in the way its insurance structure will be run.
This can be achieved where the captive is established in the island with partners that are also connected with the parent company, for example the captive might be established with a local bank, like Barclays, that also provides banking services to the captive's parent company. Primarily the benefits centre around a greater familiarity between the parties responsible for establishing the captive which grants flexibility in terms of establishing the structure, choosing investments and speeding up processes including the establishing of basic banking accounts through to the provision of collateral arrangements, whether this is through letters of credit (LoC) or trust arrangements.
For example, an arrangement for a captive entity where the parent is also known to the bank, allows the captive to be established with the balance sheet and investment objectives of the parent company being taken into account. This in turn allows a banking partner, with the enhanced knowledge of the parent company as well as the needs of the captive, to look at a broader range of solutions. The result is that the bank will often be able to increase yield through the captive, while still meeting the parent company's asset diversification programme.
This could be achieved by shifting an asset class from the parent balance sheet, gilts, bonds, equities to the captive balance sheet and not holding it on the balance sheet of the parent. Further, this can have benefits for the financial status of the captive as it makes the captive more cost-efficient in its own right and it ensures that the captive is not just viewed as a cost centre but an income generator for the parent.
Outside of asset use within the captive, these synergies can also lead to the introduction of more economically and operationally efficient structures for captives. As an example, historically, the most common way for a captive to secure its fronting insurance arrangements was by a cash backed LoC. While this may still be a valid option, we are increasingly seeing captive boards using alternative options that are more flexible and cost effective, such as the Security Trust Agreement (STA), and also looking at ways in which the assets of the captive can generate increased yield, within defined risk parameters.
Through seeking to implement new strategies of asset holding into captives, such as the STA, a historical hurdle has been the lack of understanding of these products and their use. With the increasing access to the parent as well as the captive, we have now started to find these ideas are being better received. Principally this is because these products are not far removed from what many larger corporates will use in their day-to-day activities and this knowledge is now being brought closer to the captive structures. The representative(s) from the parent company that sit on the board of the captive can be helpful in shaping discussions and decisions taken, while recognising the separate governance structure around the captive.
As the ties between parent company and a captive are reinforced at respective board levels, this has changed the emphasis for captive service providers who now have to view the process of establishing captives more holistically. Previously, decisions were principally made based on what was best for the captive. We are experiencing an increasing trend in captive managers informing us that they have to bear in mind that what is good for the captive may not be good for the parent. We are also witnessing that the representation on the captive board is increasing in seniority from the parent company e.g. a finance director currently where previously a finance controller would have been present. This is a response to parents wanting the captive to work harder for them as they are no longer guaranteed to be self-sustaining through interest rate return on cash held alone.
This evolution of captive boards has meant that increasingly they are looking at a broader range of potential solutions for the captive that drive efficiency and return. Shared banking providers also means that the representatives of the parent company that sit on the captive board will typically already know the capabilities and individuals within the bank the captive is dealing with, they can therefore be more demanding and insistent on what they expect and wish from their banking partner.
Having closer ties between the two, and indeed between the advisors and relationship managers of each party, means that these decisions can be made more easily and that all parties can be kept informed of why certain actions are being taken. To illustrate the benefit of this approach, one of Guernsey's leading independent captive managers gave us their view: "The client appreciated the 'joined-up' approach used by Barclays in bringing the client's UK relationship manager into the discussions with the captive board in Guernsey.
The parent company and the captive were already both using Barclays' banking services, and the UK relationship manager's knowledge of the potential expansion into the captive's investment management activities enabled her to link in with the parent company's treasury team and ensure that their reporting and other requirements were being met from a group perspective." Guernsey is particularly active in promoting this part of the captive management space because it demonstrates the importance of ongoing management to the successful use of captives. Rather than just a handy jurisdiction for establishing a structure, the island has billed itself as home to professional advisors who can do things differently, building strong relationships and maintaining and evolving those to offer a better service. This sets the island apart and focuses on the value-add, how if captive companies look beyond their partners as service providers and look to create mutually beneficial relationships then success is assured.
Part of any successful relationship includes having an eye to the future. From an insurance perspective, Solvency II has created challenges and opportunities. In this particular case this has provided benefits for Guernsey as it is not part of the European Union. The banking industry also continues to go through change, with Basel III affecting the treatment, and therefore the potential cost, of letters of credit. We continue to see Guernsey captive managers being proactive to change, as they work with their clients not only on their day-to-day requirements of the captive, but planning for the future to make sure captives in Guernsey are equipped to deal with future changes in a positive way.
Above all, working with existing contacts gives great comfort to companies looking to establish a captive. In an era when 'know your customer' is increasingly important it is perhaps not surprising that 'know your service provider' is becoming more critical to business decisions. Using the same banking partners for both corporate and captive structures makes business sense and reflects Guernsey's resolve to provide a more holistic approach in the initial establishment of a captive, while also aligning service providers that will be able to support the captive as its needs change over its lifecycle.
An original version of this article was published in Captive Review's Guernsey Report 2014.
For more information about Guernsey's finance industry please visit www.guernseyfinance.com.
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