Answer ... The majority of licensed insurers in Guernsey carry on international insurance business (whether general or long-term business), rather than domestic business. Separate licences are required to conduct international or domestic business, long-term and general business.
Each insurance licensee in Guernsey falls under one of the following categories:
- Category 1 – commercial life insurers: Long-term insurers with any element of unrelated party business;
- Category 2 – commercial life reinsurers: Long-term reinsurers with any element of unrelated party business;
- Category 3 – commercial general insurers: General insurers with an element of unrelated party business;
- Category 4 – commercial general reinsurers: General reinsurers that provide reinsurance to commercial insurers, whether or not part of the same group, and with no direct business;
- Category 5 – captive (re)insurers: Life or general insurance or reinsurance entities created and owned, directly or indirectly, by one or more industrial, commercial or financial entities or associations, the purpose of which is to provide insurance or reinsurance cover for risks (other than commercial insurance risks) of the entity or entities to which it belongs, or for entities connected to those entities;
Category 6 – special purpose entities:
- Special purpose insurers as defined under the Insurance Business (Special Purpose Insurer) Rules 2016; or
- entities that the Guernsey Financial Services Commission (GFSC) agrees in writing may fall into this category – these include longevity risk transfer cell captives of pension schemes.
- Category 6 is primarily intended for insurers whose underwriting and counterparty credit risk are effectively eliminated. Examples include transformer cells, fully collateralised catastrophe cells, insurance-linked securities (ILS) cells and fully funded entities.
Cell companies can be composite insurers – that is, writing long-term and general business out of different cells.
Answer ... Insurers in Guernsey are typically structured as:
- non-cellular companies limited by shares;
- protected cell companies limited by shares; or
- incorporated cell companies limited by shares.
A Guernsey insurer can also be structured as a limited partnership.
Guernsey pioneered the concept of the protected cell company in 1997 and since then it has been copied around the world, including, 20 years later, by the United Kingdom. A protected cell company has a ‘core’ and any number of protected cells, all within the same legal entity. The assets and liabilities of each cell and the core are statutorily segregated under the provisions of the Companies Law, so each cell and the core are bankruptcy remote from each other. Each cell and the core can be owned by different owners to facilitate a multi-owner structure or ‘rent-a-cell’ structure, which affords greater cost efficiencies and speed of set-up compared to establishing a standalone company. This structure is used across the different categories of re/insurers, but particularly for captives and special purpose entities.
An incorporated cell company works in a similar way to the protected cell company, except in this case each of the cells is incorporated and a separate company in its own right. This facilitates risk-sharing arrangements between cells or (as per the protected cell company model) a ‘rent-a-cell’ structure where each cell is separately owned. The incorporated cell company is primarily used for pension longevity risk transfer transactions, whereby a pension scheme owns an incorporated cell and uses it as its captive to insure the scheme’s longevity risk (ie, the risk of its pensioners living longer than expected). The cell then reinsures 100% of the risk to the commercial reinsurance market. This is a cost-effective way of directly accessing the reinsurance market by ‘disintermediation’. Guernsey was the first jurisdiction to provide this innovative captive solution for pension scheme longevity risk in 2014 when the United Kingdom’s BT pension scheme insured £16 billion of its longevity exposures through a Guernsey incorporated cell. Guernsey is the leading jurisdiction worldwide for longevity swaps using a captive solution.
Guernsey also has the most flexible regime for special purpose insurers, which can meet their ‘fully funded’ requirement through either paid-in collateral (from debt or share issuances) or contingent collateral, including a letter of credit, reinsurance, partly paid share capital or another financing mechanism approved by the GFSC; or there can be a combination of paid-in and contingent collateral. Guernsey also permits clawback and top-up of collateral and has a collateral placement grace period of 30 days for administrative delays in funding – for example, on renewals or top-up requests.
Guernsey was the first jurisdiction to introduce a hybrid investment fund and special purpose insurer structure, with investment fund cells and ILS cells within the same cell company.