A Leading International Insurance Centre
Guernsey is a leading international insurance centre with a reputation for innovation and professionalism in providing a range of risk management solutions.
The Island plays host to subsidiaries of major companies such as AIG, Aon, Catlin, Converium, Generali, Heath Lambert, Hiscox, Jardine Lloyd Thompson, Marsh, Old Mutual, Royal & SunAlliance and Willis. Independent, boutique operators such as Heritage Insurance Management and Alternative Risk Management (ARM) are also present, providing a holistic environment for insurance solutions.
Guernsey’s international insurance sector comprises pure captives and commercial insurers using flexible vehicles such as Protected Cell Companies (PCCs) and Incorporated Cell Companies (ICCs) to write an extensive range of different business. This includes a growing life insurance sector which comprises firms which service the life and health insurance needs of high net worth individuals, companies which provide insurance-based employee benefits like life and health to international corporates and increasingly includes the use of insurance policies for investment purposes as part of broader wealth management strategies.
However, it is captive insurance for which Guernsey is renowned.
Captive insurance is effectively self-insurance. In its purest form, it is where a company (the captive) is set up by its owners primarily to insure the risks of its parent (and/or subsidiaries). This can offer several advantages in comparison with insuring through the commercial market:
insuring unusual or catastrophic risks or multiple small risks
“personalising” premiums which relate to the insured’s previous claims record only
avoiding having to subsidise large overheads and profit margins of commercial underwriters
gaining direct access to wholesale and reinsurance markets
benefiting from the investment return on retained premiums
retaining the excess of net premiums over claims within the group
creating taxation efficiencies – the payment of insurance premium is deductible in arriving at profits and receipt is at the group’s offshore captive
establishing improved risk management and understanding of the cost of risk
Many large public and international organisations have assessed how these potential advantages apply to their operations in practice and they have subsequently abandoned the commercial market in favour of establishing a captive.
However, small to medium sized enterprises (SMEs) have found that the benefits of a captive, given the likely volume of business, can be outweighed by start-up and on-going costs. Participating in a ‘rent-a-captive’ scheme offers the advantage of sharing those expenses but firms are cautious about doing so in a conventional company, where all of the assets and liabilities are linked and there is a risk that the failure of one insurance programme will lead to the loss of assets relating to another.
In 1997, Guernsey pioneered the Protected Cell Company (PCC) – a company made up of a core and individual cells, where the legal segregation ensures that no claim against one cell will be covered by the assets within another. Several jurisdictions, including Guernsey, have also now introduced the Incorporated Cell Company (ICC). An ICC, like a PCC, has cells but they are separately incorporated and distinct legal entities, offering an added layer of protection in the separation of assets and liabilities.
The use of a third-party cell company rather than a full-blown captive has distinct benefits which for SMEs, in particular, now make captive insurance far more viable:
savings from reduced reporting requirements and shared costs
reduction in the amount of executive time required by the cell owner
quicker and cheaper to set up and exit due to different legal processes
need to cover the minimum margin of solvency and the risk gap but this may be less than the £100,000 minimum required for a separate captive
using a PCC can reduce the tax burden, for example in the U.K. it is possible to avoid being subject to Controlled Foreign Company legislation
There is growing recognition of the benefits of captive insurance, as evidenced by the continuing rise across the globe in the number of captive, PCC/ICC and cell formations. (The Journal, the magazine of the Chartered Insurance Institute, reports in the October 2007 article ‘Capturing Interest’ that there are some 5,000 captives globally, writing more than $20bn in premium and with a capital and surplus at more than $50bn). However, some still feel that more needs to happen for many other firms to gain savings by using captives as part of their risk management programme. Such are the potential benefits of captive insurance for all sizes of organisation that an insured’s risk management strategy could be considered somewhat deficient in scope and responsibility if it does not involve the use (or at least consideration) of some form of captive insurance.
The Guernsey Option
Many jurisdictions around the world offer captive insurance, including the use of the cell company. However, it is Guernsey which can boast the richest heritage in these areas: the insurance industry in Guernsey has origins dating back to the eighteenth century and the first captive was established in the Island in 1922. It is 21 years since the Island put in place its robust yet pragmatic regulatory framework for captives and the tenth anniversary of when the jurisdiction introduced the PCC to the world.
2007 was therefore always going to be landmark year for Guernsey’s captive insurance but beyond these milestones, the year has also proved particularly significant in terms of the continued growth in the Island’s captive insurance industry, the substantial promotion of the sector and enhancements to the Island’s captive infrastructure. Guernsey is far from resting on its laurels.
The expansion of Guernsey’s captive industry meant that by the end of 1998 the Island was playing host to 349 captives. By the end of October 2007, though, this had dropped to 303. However, far from illustrating decline, these figures demonstrate the evolution in the continuing growth of the Island’s captive insurance industry.
|Figure 1a. Number of International Insurers
Figure 1b. Number of international insurers
|Figure 2a. Gross assets, net worth, premiums (£bn)
Figure 2b. Value of Premiums Written (£bn)
Figure 3a. Source of Captives, PCCs, ICCs and Cells Licensed in 2006 (%)
|Rest of Europe
Figure 3b. Source of Captives, PCCs, ICCs and Cells licensed in 2006 (%)
Ten years ago, in 1997, Guernsey pioneered the PCC concept. By the end of that year there were six PCCs and 14 cells but by the end of October 2007 this had risen to 71 PCCs and 262 PCC cells. In addition, following from its introduction of the innovative Incorporated Cell Company (ICC) concept, Guernsey now has its first insurance writing ICC and an ICC cell. The total number of entities has risen from 399 at the end of 1998 to 638 at the end of October 2007. Alongside this, whereas in 1996 the industry wrote business with gross assets of £6.4bn, a net worth of £2.3bn and premiums of £1.7bn, in 2006 this was £18.8bn, £6.5bn and £3.4bn respectively.
Put simply, Guernsey is still the leading captive insurance jurisdiction in Europe and number four in the world in terms of premiums written.
In 2006 51% of the captives licensed in Guernsey had U.K. parents. This is a smaller percentage than in the past. The remaining 49% of captives established by companies from across the world include continental Europe, U.S.A., Hong Kong, Japan, the Cayman Islands, Saudi Arabia and South Africa (see figures 3a and 3b).
Guernsey’s move into new markets has been precipitated by its position as a mature captive domicile – for example, approximately 40% of the FTSE 100 companies already have captives in the Island. Therefore, Guernsey is now engaging with the U.K. broker community to inform them on how the development of the cell company – with lower barriers to entry – means that the benefits of captive insurance are now more accessible to their SME clients.
Indeed, GuernseyFinance – the promotional agency for the Island’s finance industry – has been disseminating these messages at national and regional events of the British Insurance Brokers Association (BIBA), with contributed articles and advertisements in its in-house publication The Broker and through editorial and advertising opportunities in other journals aimed at brokers. The agency continues to work with BIBA’s Executive Board and Regional Committees in organising initiatives, including presentations at a local level, to educate brokers.
This is in addition to GuernseyFinance’s work, in conjunction with the local industry, to promote the captive sector more broadly through attendance at third-party events, such as RIMS, AIRMIC and FERMA, hosting its own events, notably the Guernsey Insurance Forum 2007 in London and gaining publicity through editorial and advertising in the international trade media. 2008 promises a further increase in these activities and it has already been announced that the Guernsey Insurance Forum 2008 will be held on Wednesday 12th November, again at the Queen Elizabeth Conference Centre in Westminster.
Enhancing the Infrastructure
In promoting the industry, one of the key features to be emphasised is the expertise and infrastructure which has developed in Guernsey. The Island now plays host to 26 captive managers, ranging from boutique operations to large international players and independent captive managers through to broker-tied managers. Guernsey’s captive industry is renowned for its experience, expertise and professionalism and in addition, devotes significant resources to business development, enabling the identification and implementation of innovative and bespoke insurance solutions.
The Island also has a robust yet pragmatic regulatory environment provided by the Guernsey Financial Services Commission (GFSC). It is also at the forefront of regulatory developments, as demonstrated by the fact that Guernsey, through the GFSC, sits on the Executive Committee of the International Association of Insurance Supervisors (IAIS) and has been asked to chair a sub-group which is producing a guidance paper on the supervision of captives as a way of informing and educating fellow IAIS members who are less familiar with the concept.
2007 has been a year in which Guernsey has, through growth, promotion and infrastructure enhancements, further consolidated its position at the top-table of international captive insurance centres. In addition, this year the Island has conducted a thorough review of its insurance laws and it will be a further boost to the local captive industry when the modernised legislation comes into force during 2008 – a year in which the Island also moves to a standard rate of 0% corporate tax. The future is bright.
Guernsey Fact File
Guernsey, situated 30 miles west of northern France and 70 miles south west of England, is 24 square miles in size and has a population of 60,000. The Island is a British Crown Dependency, with over 800 years of self-government. It is legislatively and fiscally independent of the United Kingdom and has its own democratically elected parliament, the States of Guernsey.
Guernsey also enjoys a special relationship with the European Union. Terms negotiated on the U.K.’s accession to the EEC mean that the Bailiwick is within the Common Customs Area and the Common External Tariff; essentially it enjoys access to E.U. countries for physical exports without tariff barriers. Other rules and directives do not apply though, unless voluntarily accepted.
The Island is English speaking; uses the Pound Sterling, is in the same time as the U.K., and is in close proximity to and has regular air links with London and the continent.
In preparing this Spotlight article we received invaluable assistance from GuernseyFinance in St Peter Port for which we are grateful.
telephone +44 (0)1481 720 091)
If you would like Worldwide Risk Solutions to conduct an economic, business and insurance survey of any international markets please contact us – Details below.
We trust that you all had a happy and successful 2007 and hope that 2008 will bring good health and prosperity. If Worldwide Risk Solutions can help you identify opportunities and achieve further profitable growth, we would be happy to help. And should you be passing through London, please let us know.
In our next e-newsletter we will feature a Spotlight on Vietnam. This country has seen more than its fair share of pain and agony during the last century but what is its real background? There are many unknowns. In our next edition of WoRdS we will look at a bit of history and what is going on there today.
See our Contact Details
George Worsley, Director
Worldwide Risk Solutions
Telephone +44 (0)1444 450 919