Originally published MENA Insurance Review, September 2011.
Peter Niven, Chief Executive of Guernsey Finance, says that captive owners from across the globe continue to view Guernsey as an attractive domicile – and there is new evidence to support the claim.
Guernsey's first captive insurance company was incorporated in 1922. Since then, Guernsey's insurance market has grown to the extent that research from both Business Insurance and Captive Review recognises the Island as the largest captive domicile in Europe and number four globally.
The strength of Guernsey's captive insurance sector is reflected by the fact that approximately 40% of the leading 100 companies on the London Stock Exchange with captives have them domiciled in the Island.
Guernsey plays host to subsidiaries of global names such as Aon, Marsh and Willis as well as independent, boutique operators such as Heritage Insurance Management and Alternative Risk Management (ARM), providing a holistic environment for insurance solutions.
Nearly 60% of the international insurers licensed in Guernsey have their parent company located in the UK however firms from across Europe, the USA, South Africa, Australia, Asia, the Middle East and the Caribbean have established captives in the Island.
The Island's insurance sector has seen the value of business increase markedly over the last ten years so that today there are gross assets of £23.4bn, a net worth of £8.1bn and premium written of £3.4bn. In addition, the number of licensed international insurance entities is on the rise again so that by 31 July 2011 the total reached 680, comprising 265 companies, 63 Protected Cell Companies (PCCs), 335 PCC cells, 4 Incorporated Cell Companies (ICCs) and 13 ICC cells.
This is encouraging considering the maturity of our captive industry and the prevailing soft market conditions. In particular, we are seeing especially strong growth in the number of new cell formations. The Island pioneered the cell company concept when it approved PCC legislation in 1997 and has since also introduced the innovative ICC.
New Research
Strategic Risk has carried out a practitioner survey and published the results in a special supplement which accompanies the September 2011 issue.
The results show that more respondents have their captives in Guernsey than any other domicile; captive owners who use Guernsey recognise the Island's expertise in the sector, its strong links to London and the pragmatic attitude of the GFSC; and Guernsey's decision not to currently seek equivalence with Solvency II has the backing of owners with captives in the Island.
Solvency II was due to come into effect from 1 January 2013 but we are hearing is that this is now very likely to be delayed by a year to 1 January 2014. In Guernsey, we have opted for certainty. The Island is not part of the EU so we are not required to adopt Solvency II and our Government and the regulator have issued a joint statement to say that currently the Island doesn't have any plans to seek equivalence under Solvency II.
Bermuda and Switzerland (and indeed Japan) are adopting a different stance. These countries are in the first wave of equivalence applications but are doing so primarily not for their captives but to protect their international commercial reinsurance industries. However, Bermuda in particular is seeking to mitigate the effects on their captive insurance business and so we continue to monitor these developments closely.
Guernsey will continue to meet the standards of the International Association of Insurance Supervisors (IAIS) – the IMF has commended the Island for having high levels of compliance with the 28 insurance core principles of the IAIS – but its proportionality principles mean that we will provide a more attractive environment for captive owners and other niche insurers.
Questions & Answers
Q: When was captive legislation introduced within the domicile?
Peter Niven (PN): The insurance industry in Guernsey has its origins dating back to the 18th century and the Island's first captive insurance company was incorporated in 1922. Insurance business conducted in Guernsey has been subject to regulation by the Guernsey Financial Services Commission (GFSC) since December 1986 when The Insurance Business (Guernsey) Law, 1986 came into effect. This has been superseded by The Insurance Business (Guernsey) Law, 2002 as amended.
Q: What types of captive structure are available within the jurisdiction? How do these structures differ?
PN: Guernsey offers a wide range of structuring options for captive insurance entities, including limited companies as well as cell vehicles, the Protected Cell Company (PCC) and the Incorporated Cell Company (ICC).
The Island pioneered the cell company concept when, in 1997, it introduced PCC legislation. A PCC is one company made up of a core and individual cells. With a PCC, unlike in an ordinary company where all assets and liabilities are linked, the assets and liabilities of the different cells will remain separate from each other so no claim against one cell will be covered by the funds of another.
Guernsey has also introduced the innovative ICC, which, like a PCC, has cells but they are separately incorporated and distinct legal entities. This provides an extra layer of protection for investors who may be concerned about the legal standing regarding ring fencing in PCCs while also providing for more restructuring flexibility.
Q: What are the capitalisation and surplus requirements for each available captive structure?
PN: The minimum capital capitalisation requirements are £100,000 for insurers writing general (non-life) insurance business. Minimum margin of solvency requirements for general insurance business are 18% of the first £5 million of net earned premium plus 16% of any excess or 5% of the loss reserves, whichever is greater.
Q: What is the current tax regime applicable on captive insurance companies within the jurisdiction?
PN: Guernsey has a 'Zero-10' tax regime where the standard rate of tax for all companies, including all captive insurance companies, is 0%. Exceptions include certain banking business, which is taxed at 10%. The 'Zero-10' regimes of the Crown Dependencies (Guernsey, Jersey and the Isle of Man) have however come under scrutiny from the EU, with the Isle of Man and Jersey specifically under review from the EU Code of Conduct Group for Business Taxation. Guernsey is independently undertaking its own review but has been clear that any new regime must be both internationally compliant and competitive. Indeed, the Chief Minister, Lyndon Trott, has said "at the forefront of our deliberations is the need to retain the competitive edge of our insurance industry and we fully appreciate the need to retain tax neutrality for the captive industry."
Q: What recent amendments to the jurisdiction's legislation should risk/insurance managers be aware of?
PN: At the beginning of 2011, the Guernsey Government and regulator issued a joint statement to announce that currently the Island is not seeking equivalence with the EU's proposed regulatory regime for insurance and reinsurance business, Solvency II. This provides certainty to our existing and potential clients and we will continue to meet the standards of the International Association of Insurance Supervisors (IAIS) but the principles of proportionality mean we will provide a more attractive environment for captive owners and other niche insurers.
Guernsey was one of the first jurisdictions to introduce a risk-based approach to regulation and in recent years this has developed with the introduction of the Own Solvency Capital Assessment (OSCA) regime. This is an important part of meeting the standards of regulation and supervision of the IAIS. Indeed, the International Monetary Fund (IMF) has commended the Island's regulatory regime as having a high level of compliance with the 28 insurance core principles of the IAIS.
Q: Who is the regulatory contact for the jurisdiction?
PN: Dr Jeremy Quick, Director of Insurance, Guernsey Financial Services Commission (GFSC). Email: info@gfsc.gg
For more information about Guernsey's finance industry please visit www.guernseyfinance.com.
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.
