Guernsey: No Captive To Fortune: Guernsey Confirms Stance On Solvency 2

Last Updated: 26 May 2011
Article by Michael Adkins

On 25 January this year, in a joint statement, the States of Guernsey and the GFSC confirmed that it was not Guernsey's present intention to seek third country equivalence under the EU's 'Solvency 2' directive. Industry groups and trade publications in Guernsey and other offshore jurisdictions have applauded this strong clarifying statement, coming after what has been a concerted lobbying effort at local level. What is solvency 2, and why is equivalence not in Guernsey's interests?

Solvency 2

Solvency 2 might be described as Basel II for Insurers. That is, it is a set of measures, the framework of which is set out in an EU directive, intended to ensure that insurers operating within the European Economic Area (EEA) meet certain minimum levels of capital adequacy, whilst also meeting minimum standards for systemic control of risk and providing transparency to regulators and others. In addition to the enhanced consumer protection for policy holders that these measures will bring, one of the key objectives of Solvency 2 is the harmonisation of national laws within the EEA which are at present inconsistent between member states.

The financial requirements are at the heart of Solvency 2. The directive sets up 3 basic financial limits or obligations:

  1. A Solvency Capital Requirement, designed to be calculated at such a level that an insurer has sufficient coverage of its liabilities from its 'own funds' such that policyholders are likely to be protected from loss with 99.5% confidence (i.e. risk of exposure is a once in two hundred year event). Breach of the Solvency Capital Requirement is designed to act as a trigger for scaled regulatory intervention;
  2. A Minimum Capital Requirement, corresponding to a level of own funds coverage of liabilities between 25% and 45% of the Solvency Capital Requirement (subject to certain absolute limits) designed as a trigger for immediate revocation of the insurer's authorisation to conduct business; and
  3. A Technical Provision, being a liability in the insurer's accounts corresponding to the amount that the insurer would have to pay another insurer to take over its business obligations to policy holders. The purpose of the technical provision is to provide a further level of protection for policyholders by seeking to ensure that there is sufficient provision to transfer the business in the event of failure or be attractive enough to generate sufficient internal or external capital contributions to restore minimum solvency levels.

In this regard though, it is important to realise that the Solvency 2 directive itself is merely a framework. In line with the prevailing Lamfalussy process of European lawmaking, the directive itself imposes core obligations and prohibitions, enshrining the basic tenets of principle which are intended to be supplemented with detailed regulation in the form of 'implementing measures'. This regulation comes into being in a two stage approach involving expert technical committees and then harmonisation work by EEA national regulators. Accordingly, whilst the formulas are in place, the devil will be in the detail, particularly in relation to the classification the assets and liabilities which will form the building blocks of the financial requirements.

Guernsey's stance

Like previous EU directives in this field (i.e. the AIFM directive) there is provision for third countries (i.e. non EU states) to provide regulated services within the EEA without infringing the directive, provided that there is the necessary degree of 'regulatory equivalence'. In determining not to seek regulatory equivalence Guernsey has effectively said that it will not be ensuring its regulated insurers meet the financial and other requirements imposed by Solvency 2 and therefore is effectively shutting the door to Europe for those businesses.

Why is this a good thing? To understand the position taken by the Guernsey financial authorities, and the rare 'pat on the back' they have got from industry for taking it, it is important to keep in mind the structure of the Guernsey insurance industry. Notably, Guernsey's insurance market is dominated by captive insurers. Almost all insurers licensed by the GFSC are captives. In fact, it is the pre-eminent domicile for captives in Europe and somewhat incredibly, the fourth largest jurisdiction in the world.

Whilst the Solvency 2 directive purports to apply to captives, there are good reasons why (at least for pure captives) it is unnecessary, and may be self-defeating. First, pure captive insurers have only a single ultimate client, by definition. This client may or may not have its own regulatory capital adequacy requirements in its field of business. Regardless, the risks of the captive failing will not fall on the 'mum and dad' policyholders of Europe, but the group itself. Whilst undoubtedly this may cause hardship to shareholders, employees and others connected with the group, the risk of such hardship is one that is faced by all companies and corporate groups. The mere involvement of a captive insurer within the group structure does not seem to provide sufficient justification, from a regulatory policy perspective, for the additional regulatory intervention embodied in Solvency Second, pure captives do not need to actively market their products in Europe or anywhere else. This is a marked contrast from say, the AiFM directive, where the treatment of 'passporting' was keenly watched locally, given that too restrictive a result may have shut the door on one of the local industry's key markets. Accordingly, provided that the Solvency 2 Directive does not seek to regulate that provision of captive insurance in Guernsey (wherever the group may do its business), there simply is no need to voluntarily burden the industry with the compliance costs of increased regulation.

Finally, and in some senses this may emerge as the most important issue as the implementation progresses, Solvency 2 aims to achieve its objectives by constraining the freedom of insurers to manage their balance sheets. However, the business rationale for the very existence of captive insurers is the flexibility that insuring one's own risks can give a corporate group. Solvency 2 and Guernsey may just be fundamentally incompatible. However, it is relatively early days (the implementation of Solvency 2 being now delayed to early 2013), and the Guernsey authorities' joint statement certainly does have a bit of 'wait and see' about it - it may be that as implementation progresses the stance of the GFSC and other will change and Guernsey's insurers may find themselves caught by Solvency 2 after all.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

In association with
Related Topics
Related Articles
Up-coming Events Search
Font Size:
Mondaq on Twitter
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of

To Use you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions