There are two main types of insurers in Guernsey - international insurers (including captives) and domestic insurers which as the name suggests mainly underwrite risks within the Bailiwick of Guernsey. This note deals mainly with international insurers and particularly captives that do not write long term (ie life) business.
What is a captive?
A captive insurer is an insurance vehicle that is owned by the policyholder and insures only those risks of the policyholder or its subsidiaries. There are numerous advantages when compared to obtaining insurance directly from commercial providers. Insurance can be purchased effectively at cost price, ie without paying for an insurance company's overheads and profit costs. The captive will also have direct access to wholesale re-insurance markets, improved and bespoke risk management and the ability to retain both the underwriting profit and any investment profit.
Guernsey is home to some of the largest insurance names in the industry and has a long track record in insurance, making it the leading captive domicile in Europe and the fourth in the world. As at the end of July 2013 there were 774 international insurers licensed in Guernsey with over 450 cells, predominately captives. In the previous 12 months, there was a net growth of 35 licensees based in Guernsey.
Guernsey is known internationally for its robust but flexible laws relating to both legal bodies and arrangements and financial services regulation. Its long history in financial services, and in particular insurance, means that there is a wealth of experience, expertise and intellectual capital. Guernsey was the pioneer of the now globally recognised and replicated segregated cell structure companies such as protected cell companies and incorporated cell companies. These structures are particularly well suited to the captive insurance market. Each policy holder can own a cell of the company and the assets and liabilities of each cell are ring-fenced from others. In effect a particular cell can transact with a third party and its liability is limited to the assets attributable to that cell. Ongoing running costs can be reduced by using a cell of a cell company.
In order to carry on insurance business in or from within the Bailiwick of Guernsey an entity needs to be licensed by the Guernsey Financial Services Commission (the GFSC) under the Insurance Business (Bailiwick of Guernsey) Law 2002 (the Law). Applying for a licence is a streamlined exercise with the applicant having to demonstrate that they fulfil a statutory "minimum criteria" test including by conducting their business with prudence and integrity, ensuring the directors, owners and other controllers are fit and proper and that an appropriate "General Representative" is appointed. The General Representative function is normally fulfilled by the insurance manager.
The Insurance Business (Licensing) Regulations, 2010 set out the details of what the application should comprise and includes providing:
- details of ultimate ownership;
- audited accounts of the applicant and/or those of the ultimate holding company;
- proposed method of capitalisation;
- a business plan to include financial projections, forecast figures and a risk statement; and
- a summary of any re-insurance programme.
Conduct of Business, Directors and Auditor
The business of a licensed insurer needs to be directed by at least two persons with appropriate standing and experience and must be carried out in or from within the Bailiwick of Guernsey. A licensed insurer must have at least one director who is not, broadly speaking, an "associate" of the insurer and who is not responsible for the management of the insurer's business. According to GFSC policy, corporate directors are not permitted. An approved auditor must also be appointed.
Licensed Insurers' Corporate Governance Code
In addition to their general duties, the directors of a licensed insurer need to comply with the Licensed Insurers' Corporate Governance Code. A statement in respect of compliance with this code is a necessary part of the annual return referred to below.
Ongoing supervision and compliance
Financial RequirementsWhilst the minimum capital requirement for general insurers set out in the Law is £100,000, in practice the GFSC can and does require insurers to have a higher level of capital dependent on the nature of the business.
The insurer must also maintain shareholder funds which are a minimum of 75% of the minimum capital requirement and a margin of solvency (ie an excess of approved assets over the value of its liabilities) and approved assets.
The minimum solvency requirement is (for general business) the greater of 18% of the first £5m of net premium income and 16% of the net premium income that exceeds £5m; or 5% of the value of the loss reserves. Again the Law provides that the GFSC may require a higher margin of solvency depending on the insurer's business.
The Insurance Business (Approved Assets) Regulations 2008 set out what constitutes "approved assets" for the purposes of maintaining the margin of solvency. These approved assets are split into four classes and The Insurance Business (Asset and Liability Valuation) Regulations, 2008 set out the proportion of those assets held by an insurer that will count towards the necessary value of approved assets.
Each licensed insurer is required to file an annual return with the GFSC which comprises of various matters including an up to date business plan, completed margin of solvency and approved asset calculation.
For captives, the application fee and the annual fee is £5,140 (pro rated for the first year). Where the new captive is a cell of an existing protected or incorporated cell company then the application fee is £1,450 and the annual fee is £1,680 (pro rated for the first year).
In September 2013 the GFSC issued a consultation paper which proposes some significant updates to the insurance regulation regime. In brief, the consultation discusses a risk based solvency regime based on certain Insurance Core Principles of October 2011. Insurers would be split into five categories for which the GFSC would have varying tolerance to insolvency and failure. For example the GFSC would have a low risk tolerance for the failure of a commercial life insurer. Conversely given the reduced risk to the public posed by captive insurers or re-insurers, a more proportionate approach should be taken. Other proposed amendments include corporate governance and public disclosure (which would not apply to captives). This consultation is again evidence of the GFSC's pragmatic and proportionate approach, based on in depth knowledge of the insurance market and the risks therein.