38 emea captive 2014
Solvency II stance gives
Guernsey a captives edge
Fiona Le Poidevin outlines how
differentiation outside Solvency II
and innovative structures continue to
set Guernsey apart from the global
In December 2013 the European Captive Insurance and
Reinsurance Owners’ Association (ECIROA) voiced its concerns
at the way Solvency II had been drawn up. The directive has had
its implementation date pushed back to 2016 but, as it currently
stands, eight out of 10 European captives would fail to qualify for
solvency capital treatment because they carry liabilities underwritten for
disposed entities, according to ECIROA.
As a result, ECIROA has written to the European Commission and the
European Insurance and Occupational Pensions Authority (EIOPA ) to
ask them to change the rules. If they do not, then ECIROA believes many
captives will be forced to close or move outside the EU to escape the
onerous capital and reporting requirements required under Solvency II.
This is exactly why Guernsey announced it was not seeking equivalence
under Solvency II back in January 2011. We declared our stance as early
as possible because we wanted to give current and potential clients
certainty and clarity regarding the regulation of insurance business
in Guernsey. The Island stated at that time that applying Solvency II
as it was then constructed would burden insurers in Guernsey with
additional costs and render currently effective captive business plans
uneconomic, particularly as Solvency II was not designed for captives
as they have parent companies as their policyholders.
We certainly feel the early clarity we gave in relation to Solvency II has
already played a part in the continued growth of our captive sector over
the past couple of years. Indeed, a number of Guernsey practitioners
have already reported receiving instructions to migrate captives from
jurisdictions such as Bermuda to Guernsey, due to the uncertainty
created by the delays associated with Solvency II and the requirements
for equivalence with the directive itself.
Figures to the end of December 2013 from the Guernsey Financial
Services Commission (GFSC) show that there were 89 licences issued
last year, bringing the number of licensed international insurers in
Guernsey to 758—a net growth of 21 international insurers over the
previous 12 months. This clearly demonstrates that captive owners
recognise Guernsey’s expertise in the sector. They like our close
proximity to London, our efficient and proportionate regulation and that
our decision not to seek equivalence with Solvency II had the backing
of owners with captives already on the Island.
Another reason for the recent growth we have seen within our
insurance industry relates to the use of protected cell companies
(PCCs), incorporated cell companies (ICCs) and associated cells within
the increasingly popular concept of insurance-linked securities (ILS).
Reasons for the growing attractiveness of ILS as a structure and an
alternative asset class for insurers and investors are twofold.
ILS permits an insurer to purchase additional protection for low
frequency, high severity losses, including natural and non-natural perils,
operating in the traditional insurance market, typically in the form of
catastrophe bonds or collateralised reinsurance.
In addition, investors like ILS because returns are non-correlated with
the general financial markets.
emea captive 2014 39
written fully collateralised reinsurance primarily covering property
catastrophe risks, marine, crop and other classes such as premium
reinstatement or prize indemnity. Protected cells in Guernsey are also
being used to conclude swaps and derivatives transactions under
International Swaps and Derivatives Association (ISDA) agreements as
an alternative to a reinsurance contract.
In 2012, the Channel Islands Securities Exchange (CISE), formerly
known as the Channel Islands Stock Exchange (CISX), became home
to the first private catastrophe bond listed on any exchange worldwide
when Aon Insurance Managers in Guernsey—which has been involved
with more than 80 ILS transactions since 2006—worked with Swiss ILS
manager Solidum Partners AG to establish Solidum Re Eiger IC Limited.
It is an insurance vehicle which listed bonds with a value of $52.5 million
on the CISE and was the first CISE listing where natural catastrophe
perils are the underlying exposure for ‘principal at risk’ notes. It also
incorporated a dual listing with the Vienna Stock Exchange.
Cedric Edmonds, partner at Solidum Partners and director of Solidum
Re Eiger IC Limited, said Solidum Partners selected Guernsey as its
jurisdiction of choice for its incorporated cell reinsurance company
and private cat bond platform due to the “incorporated cell company
legislation and the quality and ‘can do’ attitude of the service providers”.
As Europe’s number one captive insurance domicile, the Island plays
host to subsidiaries of global names such as AIG, Aon, Barbican,
Catlin, Generali, Hiscox, JLT, Marsh, Old Mutual, Royal & Sun Alliance,
SCOR and Willis, as well as independent operators such as Heritage
Insurance Management, Alternative Risk Management (ARM) and
Kane. The sector is also complemented by banking, investment and
fiduciary sectors and supported by a network of professional services,
including legal, tax, accounting and actuarial advisers.
The pre-eminence of Guernsey as a captive insurance domicile is
underlined by the fact that approximately 40 percent of the leading 100
companies on the London Stock Exchange with captives have them
domiciled on the Island. Indeed, a majority of the international insurers
licensed in Guernsey have their parent company located in the UK;
however the Island’s insurance sector is truly international.
Firms from across Europe, the US, South Africa, Australia, Asia, the
Middle East and the Caribbean have all established captives on the Island.
BP has its own captive insurance company, Jupiter Insurance, domiciled
on Guernsey, as does BHP Billiton through Stein Insurance Company.
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. Since that time we have continually evolved our
offering to meet the demands of our clients. Our response to Solvency
II and our adaptability to service products such as ILS through the
expertise we have honed in the captive insurance can only enhance our
attractiveness as a location of choice. l
Fiona Le Poidevin is the chief executive of Guernsey Finance. For more
information visit: www.guernseyfinance.com
Guernsey’s great strength is that it has a long and strong heritage in
both the investment funds and insurance sectors, making it the optimum
location for ILS. Guernsey pioneered the cell company concept back in
1997 with the introduction of the PCC for use in the captive insurance
sector. The subsequent success of this innovation is illustrated by the
facts that we’re ranked as the number one captive insurance domicile in
Europe and the fourth largest globally, and that the cell company is now
used across the financial services world as an alternative application for
the structuring of various products.
PCC and ICC structures provide a low cost, low administration vehicle
to access returns from the reinsurance market and some ILS funds avail
themselves of both within their growth strategies.
At the time of writing there are in excess of 50 protected cells
established in Guernsey across four different PCC platforms having
“Guerns ey’s great streng th
is that it has a long and
strong heritage in bo th
the investment funds and
insu rance sectors, making it
the optimum lo cation for ILS.”