Guernsey is an established option for some of the world’s biggest companies, but could it be doing more to facilitate the middle market?
Comparisons between the United States’ and European markets are not always helpful or constructive, but the differences in traditional captive growth is striking.
While single parent captive and cell company formation is benefiting from increased numbers of middle market businesses viewing them as viable options in the States, there is little trend in this direction on this side of the pond.
Guernsey has had another impressive year, driven primarily by huge growth in the insurance-linked securities market.
The jurisdiction also appears to be carving out a valuable niche in attracting pension schemes to utilise its incorporated cell company (ICC) legislation.
But the middle market, if exploited and effectively sold the right captive solution, should provide big opportunities.
“It is a very difficult area of development because as you get further down the FTSE it is very difficult to do the marketing exercise – the low hanging fruit has been plucked,” says Jeremy Quick, director of banking and insurance supervision and the policy division at the Guernsey Financial Services Commission (GFSC).
“We would be very supportive of that if it brings new business. We have a set minimum capital level which is not terribly high so that is acceptable and we have the protected cell company (PCC) structure which does reduce costs.”
It is the PCCs that have long been viewed as the best suited alternative to establishing a standalone single parent captive.
The set-up costs are significantly lower and there are lower capital requirements. As of 31 December, 2014 Guernsey had 67 PCCs, containing 436 active protected cells.
It should be noted however that a large number of PCC business on the island is also ILS related.
“PCCs are that solution for the middle market,” says Martin Best, managing director of Willis Guernsey.
“A way of dipping your toe in the water of risk retention through a captive vehicle without having all the capital and frictional costs that you normally get associated with a full captive.”
One area the American service providers and domiciles have been successful in attracting middle market business is with the formation of group captives.
These have been popular for a long time particularly among trade associations and hospital or education systems.
The latter group – health and education – becomes less relevant in Europe since the majority of it is government owned and managed
Trade associations also tend to be of smaller size in the United Kingdom compared to the United States.
“Putting together a group captive is extraordinarily difficult and time consuming,” adds Best. “You really need someone very strong from within the trade association or industry who is driving it.”
The need will often also be led by a motive such as not being able to acquire suitable or affordable cover in the insurance market.
“Getting all those things lined up at the same time in the same industry is something we have struggled on with UK owners,” he says.
“Quite often the UK insurance market is quite good at providing solutions. In the very soft market that we have had for the last five to 10 years, the drive isn’t there for a compelling reason to retain risk.”
At Artex Risk Solutions, which acquired Guernsey’s largest independent captive manager Heritage Insurance Management in May 2014, there is confidence it will be able to transfer the knowledge and experience it has in managing group captives in North America to the shores of Guernsey.
A large part of Artex’s services in North America is group captive business and Paul Eaton, new business director at Artex, tells Captive Review: “I have never seen much evidence that that has happened in the United Kingdom or Europe.
“There is no good reason why it hasn’t happened because the markets in America and Europe are as competitive as each other.”
Martin Le Pelley, director at Artex, adds: “We believe there is an opportunity to transfer that group captive knowledge the firm has in the United States to our operations in Europe.”
“There are certainly opportunities there in the middle market and for us doing more in that space will be about targeting the right areas and discussing the benefits that are available through captives” RICHARD SEARLE – BDO
Despite the perceived slow take-up of captive solutions by small to medium sized companies in Europe, Guernsey’s insurance industry does give the impression that it is an area that has been and continues to be explored.
Richard Searle, partner at BDO and managing director of the firm’s Guernsey office, says because the middle market is the primary target area for the UK firm he has considered the captive options available.
“It is an area that could and should be explored further,” he says. “The perception has been companies that should have a captive already do and in recent years with everything going on in the economy businesses have probably had other things to think about.”
He adds: “There are certainly opportunities there in the middle market and for us doing more in that space will be about targeting the right areas and discussing the benefits that are available through captives.”
While the industry in Guernsey has held meetings with the GFSC to discuss what the potential options are by way of new regulations, they are in the early stages.
Dominic Wheatley, previously managing director of the Willis Guernsey office before taking over as CEO of Guernsey Finance, believes promoting new ways of utilising a captive can also lead to opportunities opening up for new types of businesses.
“Perhaps the greatest opportunity lies in the use of captives to provide product enhancements such as product warrantees or product specific insurances,” he tells Captive Review.
“An example of this would be pet insurance for a vet group or dental cover for a group of dentists, or specialist travel cover for a specialist skiing holiday company. I would say that this is an area of continued opportunity for companies who are looking to provide better products and increased value to their customers.”
Ideas around group captives, third-party risk and risk sharing have been explored to some extent by the GFSC and the industry although Quick says there are some important questions that would need to be considered before moving forward.
“We like to think of ourselves as open and happy to entertain ideas in the early stages,” Quick adds.
“Issues in this area include the borderline between what is general and what is captive insurance. We have never set a specific percentage for what could be general insurance within a captive, but never have we said having any business which is general makes it a general insurance company.
“That is something we need to look at and we have been discussing that in greater detail with the industry.”
It is clear from having canvassed much of the jurisdiction’s industry that Guernsey is aware that there may be an opportunity in spending more time specifically targeting the middle market.
With ILS and pensions providing significant volumes of new business however, it remains to be seen how concerted these efforts will be.
Richard Cutcher, editor, Captive Review.