The British Channel Island of Guernsey lies approximately 25 miles off the coast of France and some 80 miles from the closest point on the British mainland, approximately 180 miles south west of London. The Island has its own government and locals will tell you that, as part of the Duchy of Normandy, Guernsey was on the winning side at the Battle of Hastings in 1066. It is now Europe's leading captive centre and ranks number four globally in this ever-competing market.

Guernsey has been at the forefront of captive insurance for forty years and today remains the leading European jurisdiction for the management of captive insurance companies. Yet, during that time, the Island has faced many challenges to its prosperity and financial security but on every occasion it has been able to demonstrate its ability to move with the times. Even now it is perhaps difficult to see how an island of 24 square miles, in the English Channel, should have developed to the position of a global captive centre, but let's not lose sight of the physical comparison with another British territory – Bermuda, almost identical in size and lying some 650 miles south east of New York.

However, the intention here, is not to provide a comparison between domiciles but to focus on the responses delivered by Guernsey to market changes. The captive sector, and Guernsey's position as an international finance centre, is not new; collectively, and perhaps surprisingly, much is owed by way of initial development to the failings of the British government, particularly at the tail end of the 1960's.

Prior to that it is worth noting also that the Channel Islands (there are five principal islands in the group) were the only part the British Isles occupied by Nazi forces during World War II. Following the war years, tourism began to develop and the Channel Islands presented themselves as favoured tourist destinations to a British public still recovering from years of austerity. The Islands were overseas, but not foreign; the climate was pleasant but not too hot and, specifically, Guernsey was well known for growing of tomatoes under glass, had fairly full employment and, significantly, had a lower, more stable tax regime than the United Kingdom.

The late 1960's were years of austerity in the United Kingdom. The government of the time had devalued Sterling, unemployment was high, exchange control remained in place and the highest rate of personal taxation was a staggering 98%. None of this augured well for Guernsey but the Island's government – the States of Guernsey, saw opportunity and deliberately changed housing regulations so as to permit a two tier housing market and to permit newcomers to migrate to the Island bringing new areas of expertise.

There was a big difference between the Island's 20% rate of personal and corporate taxation from the rates in the United Kingdom and this assisted greatly in providing the initial impetus both for corporate development and inwards migration. Housing rules were further refined so that experienced support staff "essential workers" could benefit from more modest-cost housing in the so-called local market.

These are only part of the ingredients that began to pave the way of the Island towards the financial centre it now is. Britain's dock labour system was in a mess and in 1971 there was a national dock strike. This coincided with the prime season for delivery of Guernsey's principal export to the United Kingdom – tomatoes. Millions of tons of tomatoes were dumped: family industries that had survived wartime went broke and, if that was not enough, Britain's entry into the fledgling European Union (EU, then called the Common Market) meant that EU imports were now cheaper than the Guernsey tomato.

The industry had been dealt a fatal blow from which it would never fully recover. As if that were not enough, the next blow was to come from package tourism. The British are famous for discussing the weather, and British summers are notoriously unpredictable. Exchange control was lifted; air travel became more widely accessible and the core Channel Island holiday maker headed further south to the hotter, more dependable, weather of the Mediterranean, and often at similar cost.

Guernsey: Stubborn resilience created new opportunities

Here was an Island that, so easily, could have fallen. It was part of Britain but had determined not to become part of the EU; it had capacity in its workforce and a workforce that had proved resilient to change but it also had, in its favour, financial stability, low taxes, stable government and, now, an influx of new residents many of whom had successful business interests and experience. The Island's legislative process was simple and effective, perhaps too simple in those early days, but there was a ready willingness to commit and develop and the stigma, now immediately attached to low or zero taxation, hadn't even been conceived.

Captive insurance hadn't reached is teenage years and remained a term that was yet truly to make the journey from the Americas, but a combination of features meant that Guernsey was ready, able and willing to deliver when the first enquiries arose. Those first enquiries should bear little resemblance to what we see today but, as will become apparent, may have greater similarity than at first appears to be the case.

A close friend, now retired, tells me how he used to send a telex from his desk in London, addressed to himself in Guernsey. He would then fly to the Island to answer his own telex before sending his response back to himself. Tax and regulation, even in those early days, meant it was vitally important to demonstrate where decisions were being taken, thus the full ingredients were in the pot to ensure the Island developed the necessary resource to service a fledgling part of the insurance industry in Europe.

The name of Bermuda was already synonymous with captive insurance, but Bermuda was only serviced by twice weekly flights from London. Guernsey also had direct flights to London, but operating several times a day; it shares the same time zone and of course the same currency. With a key focus of the captive sector being to assist with risk management and to control resultant insurance costs, a mind-set change developed - a mind-set change that would see British companies locating captives in Guernsey and building a demand for local management presence and expertise. So, there is a potted history as to how Europe's leading captive insurance centre emerged as the phoenix from the ashes of not just one, but two industries – horticulture and tourism – simultaneously going into significant decline. What I have not sought to address here is the development of banking, trust, fund, accounting and the associated legal and regulatory sectors alongside, and all have grown providing the Island with a robust financial infrastructure that has permitted all sectors to flourish.

The Changing Face of Guernsey's Dominance in the Captive Sector

All of the above is history, but it assists in understanding the development of the Island's captive sector and its continuing dominance of that sector and the changing face of that dominance. The cynic, and the realist too, will say that if you hold the top position, there is only one direction in which to go, but this is where Guernsey has demonstrated continuing prowess balancing risk with development and thus maintaining its highranking position in the captive industry. The sector has responded to change whether that change has been prompted by external threat or global regulation.

As such, the sector remains robust, but it is not the same sector as was first seen to develop forty years ago. The list of developments in the Island is commendable and those developments continue to ensure development of the sector, but growth is not in the area of pure captives but spans an entire business sector using the strengths of an existing business model. The pure captive still exists although the actual number registered in the Island has remained stable for years.

Rising costs of compliance both domestically and internationally have taken their toll on this business but so too has the management structure implicitly demanded by regulators to satisfy swathes of new regulation. The pure captive is no longer the simple monoline insurer but a structure that demands board meetings, independent directors, and compliance with a comprehensive corporate governance regime.

The smaller captive was thus rendered financially unviable but is this a problem? If the captive is a tool to assist with risk management and insurance buying strategies, ultimately adding to the shareholder value of its parent, then the elimination of an uneconomic vehicle has to be a positive step. However the insurance principles remained valid. It was time for the, now well-accepted, protected cell company to fill the void created.

The table below (source Guernsey Financial Services Commission (GFSC)) details movement in the sector to November 2014.

Can anything be gauged from the content? Pure captives are stable; losses to mergers and acquisitions are equaled by the new entrants. The PCC is stable, but don't lose sight of the fact that the PCC is the facilitating vehicle and the real activity is in the cell numbers. It is here that there is undoubtedly the most interesting and revealing figure – a net increase of six cells but actual gross movement of 108 and thus the pure numbers game hides, even distorts, the true measure of significant underlying business activity.

However, the Incorporated Cell Company (ICC) is perhaps the dark horse. Still a relative newcomer, yet Guernsey has seen the formation of a significant number of ICC cells, paving the way for Insurance Linked Securities' transactions, many of which boast a size not hitherto seen in the Island. Much of this has been achieved through challenges and, at times, adversity. The Guernsey International Insurance Association (GIIA) has never been afraid to fight its corner for what its members believe to be a balanced and measured approach to regulation and international pressure. The results have been impressive.

What of Solvency II and other Regulatory Interventions? History Continues to Repeat!

As a result of GIIA pressure, the Island declared early on that it would not seek to adopt Solvency II and has since adopted its own pragmatic and balanced solvency regimes. This regime has worked to the benefit of all stakeholders. Expressions from beyond the Island as to Guernsey's demise as a captive centre have proved to be wrong. GIIA has also worked with the GFSC to mitigate the impact of accounting standard changes.

New disclosure requirements would render audits too complex and costs too substantial -- even unmanageable -- and it is this ability to work with the regulator for the benefit of all stakeholders that continues to give the local management industry an edge over its rivals. This co-operation almost certainly is not unique but it has shaped the way over the forty year period of the industry in the Island, and the Island has responded with flexibility; the very flexibility that is required when using a captive or a cell to assist in delivering a cost-effective insurance programme.

Response to Challenges to the Captive Industry Will Spell Success or Failure for Domiciles With successes come threats, and those threats are not unique to Guernsey but bring challenges to the industry as a whole. Increasing globalization means centralisation of resources. When resources become centralised, who is driving the captive strategy? Has the industry moved full circle so there is too fine a line between recommendation from the broking director's desk in London, New York or other insurance centre? Are real decisions being taken up by a captive's board, or are the options presented such that there is no viable option but to rubber stamp a proposal? Here again Guernsey has been ahead of the curve with a mandatory requirement that all captive boards must have at least one independent non-executive director, thus ensuring that decisions have to be addressed in the correct forum.

As for the future, the Island is seeing its next generation of insurance professionals rise to prominence and they are supported by a new generation of the old guard – an old guard that understands the captive industry, understands its dynamics and is available to share its expertise. At the forefront of the Island's promotion in the financial services sector is Guernsey Finance and worthy of note is that its recently appointed and well regarded new chief executive – Dominic Wheatley - is an insurance professional.

Far from resting on its laurels Guernsey is responding to change and seeking to ensure that its ability to respond to change is matched by professional development throughout its workforce. Educational Resources In the insurance sector, much is done through the Insurance Institute of Guernsey, the local institute of the Chartered Insurance Institute accredited as the leading global insurance educational body. Further resource is presented by the Guernsey Training Agency University Centre delivering courses to degree level on and off Island supporting local business needs as well as personal development.

There is no education like adversity (Disraeli) Guernsey has consistently seen threats to its position and turned those threats to opportunities. Those threats and opportunities to the insurance sector have embraced all of the following: 1986 insurance business law; CFC legislation; sliding scale tax; variable rate taxation; protected cell company development; 2002 insurance business law; incorporated cell company development; Solvency II rejection; revised capital and solvency regulations; Insurance Linked Securities, In response to every historical challenge, Guernsey has continued to move forward with ever-improving professionalism and underlying business growth.

An original version of this article was published in Captive Visions, January 2015.

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