It’s good to talk – changes to Guernsey’s solvency regime

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CAPTIVE GUERNSEY REPORT 2014
MARSH MANAGEMENT SERVICES | GUERNSEY
Guernsey as a domicile offers a
full range of captive solutions.
It was the innovator of the PCC
structure and the more recent
ICC structure. The benefi ts of
domiciling in Guernsey are clear; however, as
the global captive space develops increasing
standards as a result of regulation, changes to
Guernsey’s regime will become necessary to
remain a world leader in this space.
Recently the Guernsey Financial Services
Commission (GFSC) has sought to make a
number of changes to the Guernsey solvency
regime, which is a good example of regulatory
consultation with the industry. The process
started in early 2012 with a GFSC discussion
document concerning a move toward riskbased
solvency. This recognised the fact that
Guernsey has previously announced intentions
not to apply for Solvency II equivalence,
a decision which has been fully supported by
the industry.
However, Guernsey has made it clear that
the island would continue to comply with the
Insurance Core Principles issued by the International
Association of Insurance Supervisors
(IAIS). For Guernsey to continue to comply
with its commitments to the IAIS, it was necessary
to re-look at its current regulations. In
addition, the IMF conducts regular reviews
of the island and if Guernsey didn’t operate
under a risk-based solvency regime, particularly
given that the IMF will be looking at other
onshore jurisdictions which are subject to
Solvency II, then it could be argued that it is
non-compliant.
The initial discussion document asked the
industry to look at a variety of matters, including
the defi nition of captives and non-captives,
a confi dence interval akin to that seen
within Solvency II, and what is appropriate
in a jurisdiction like Guernsey. Another point
that came through the IAIS was called the
David Riley, head of o ce at Marsh Management Services Guernsey Limited and chairman of the Guernsey
International Insurance Association Regulatory & Technical Committee, discusses the proposed changes to
Guernsey’s solvency regime
Written by
David Riley
David Riley, head of o ce, Marsh Management
Services Guernsey Limited. David has over 25 years’
insurance experience, 13 years of which have been
spent in captive management. From January 2012
David has been head of o ce for the Channel
Islands practice of Marsh Captive Solutions. David is
a past chairman of the Guernsey International Insurance
Association and is chairman of their Regulatory
& Solvency Sub Committee.
IT’S GOOD TO TALK
22
Captive Guernsey report 2014
guernsey | Marsh Management Services
ladder of intervention, which effectively asks
‘what are the trigger points of regulatory interaction
with licensees, captives, insurers, etc.
and how does that escalate?’
Once the industry had responded to the
GFSC on the discussion document, they issued
the first version of the risk-based solvency
spreadsheet, which was then put to various
clients, amended, and sent out again in new
versions. From this, the need for a trade-off
was brought to light. If the regulator was to
allow the industry to drill down deeply into
the data on individual policies and types of
peril countries with the level of regularity
that you have in Solvency II, you can build up
a more accurate solvency picture. However,
the trade-off is the amount of time and effort
involved in this, therefore simplification was
brought in. For example, if we have one level
of solvency required for property – whether
that represents an office block in London or
an offshore drilling rig in the Gulf of Mexico –
the solvency requirement is the same for those
two property perils. This may seem intuitively
wrong, however the alternative is to have considerable
work involved for the captive manager
and potential cost involved for the client,
that they don’t find of benefit. There is also a
lot of debate about calibration for the solvency
factors and the general consensus was to base
these on Solvency II as it has been looked at
across a wide pool of licensees and is well
understood and recognised.
In Q1 2013, the GFSC requested a number of
licensee test spreadsheets as a means of establishing
the impact of solvency, and published
the results in September. This looked at 116
non-life insurers, of which 84 were captives,
with the balance being what is now categorised
as commercial insurers. Risk-based
solvency was found not to have a huge impact
on the ability of licensees to meet their solvency
requirements. That’s not to say solvency
requirements didn’t change, but because of
the way the risk-based solvency spreadsheet
was calculated in terms of assets and liabilities,
it wasn’t a major issue. This positive result
is a sign proper consultation took place. In
addition to the impact assessment, in September
2013 the GFSC also released a document
involving insurance regulation, A Consultation
Paper on the Revisions of Regulations,
Rules and Codes for Licensed Insurers, looking
at risk-based solvency, categorisation, corporate
governance and public disclosure.
There was considerable discussion from
this around risk-based solvency and the
distinguishing line between a captive and a
commercial insurer. Some companies are
clearly captives, writing first-party risk, while
others are clearly commercial insurers writing,
insuring or reinsuring third-party risk.
However, if you have, for example, a retailer
that insures its own property damage in its
captive but also provides some warranty business,
then how does that fit in the scheme of
things? The GFSC released further guidance to
answer this question in that a captive can still
be called such even if it is writing that warranty-
based risk, as long as the contract is going
to another part of the same group (which is a
pure captive), a member of association (therefore
mutual), but also if the insurance policy
is incidental to the transaction with customer,
it can still be deemed a captive and enjoy
the proportionate benefits therein. This has
caused people to look at their client base in a
different manner and make sure clients fully
understand the differences between captives
and commercial insurers. Another positive
from this process is an approved asset regime
which categorises assets that are held by captives
and commercial insurers. Under the
proposed regime, there will be no approved
asset protocol, meaning every asset will rank
towards solvency but the amount it ranks
depends on the nature of the asset itself, making
for a simplified and more efficient process
around upstream loans which currently
require regulatory interaction.
The Guernsey International Insurance
Association Regulatory & Technical Committee
sent a response on behalf of industry to the
GFSC in December. Certain managers chose to
make separate responses, which is completely
understandable as each manager has a different
client base. The GFSC are looking at the
responses received and plan to engage with
the industry next month to start the process.
We are currently looking to have regulations
in place by the end of this year for implementation
in 2015. The GFSC have been very open
to discussing this in an appropriate manner to
ensure that the changes are proportionate to
the requirements of the industry in Guernsey.
These changes are vital to ensuring Guernsey
remains a leading, competitive domicile
in light of increasing regulatory standards.
The fact that we have regular IMF visits and
reviews of our regulatory regime is important
for the credibility of Guernsey. Therefore,
there is an expectation that we will be able to
demonstrate our compliance with the relevant
core principles.
However, the risk-based solvency has to be
brought in a proportionate manner to allow the
business to continue in Guernsey in a sensible
and efficient manner and allow us to bring new
business to the island. The changes may require
further data to be included than is in place at
present and captive managers will need to
assist clients with the preparation of that data
and bringing it into spreadsheets once the final
version has been released. At Marsh, we are certainly
looking to be able to work with our clients
in an efficient manner to assist and comply with
the requirements going forward.
As far as the continued growth of Guernsey
over the next few years, I see no reason
that the trends that have been demonstrated
by Guernsey over the last couple of years in
respect to licences should cease. We have a
regulator that is supportive of the industry,
but in an appropriate manner and is engaged
with the industry to help it develop.
“The IMF conducts regular reviews of the island
and if Guernsey didn’t operate under a risk-based
solvency regime, then it could be argued that it is
non-compliant”
“As far as the continued growth of Guernsey over the
next few years, I see no reason that the trends that
have been demonstrated by Guernsey over the last
couple of years in respect to licences should cease”