Guernsey has the opportunity to make itself a more attractive captive domicile by taking advantage of increased demand in the alternative risk transfer market, according to a strategic review of the island’s insurance sector by Cutts-Watson Consulting (CWC).
CWC was commissioned by the Committee for Economic Development to investigate the current status of Guernsey’s insurance sector and to identify key areas of growth and opportunity over the next three to five years.
Guernsey’s previous insurance sector strategic review was carried out by PwC in 2016.
The review describes Guernsey’s insurance sector as “thriving” based on its diversity of offerings, consistency of demand, and complementary positioning to the other financial services sectors.
Captives in particular are highlighted as the core of Guernsey’s international insurance market, representing 35 per cent of the island’s licensed insurers. The review notes a “renaissance” of captives in 2020 with the combination of hard market and economic impact of COVID-19.
In these conditions, demand for alternative risk financing solutions is anticipated to continue in 2022 from all industry sectors, geographies and corporate entities.
As well as new captive formations, existing captives are experiencing increased activity, whether exploring new risks or seeing significant increases in exposure in the lines of business already written.
CWC notes that the Guernsey captive industry is strengthened by the island’s experienced workforce, business infrastructure, and flexible and proportionate risk-based regulation, as well as solvency requirements that are less demanding compared to Solvency II domiciles.
In addition, 2021 saw the Guernsey Financial Services Commission trial a pre-authorisation process for captive cells, which CWC describes as a breakthrough in levelling the playing field with other leading captive domiciles for speed of formation.
The review also explores Guernsey’s developing insurance-linked securities (ILS) market, which provides an alternative source of risk capital (particularly for property catastrophe risks) and is popular within the institutional investment industry.
The review finds that Guernsey Finance and the Guernsey International Insurance Association are focusing their marketing efforts on promoting Guernsey as a favoured jurisdiction for ILS and collateralised reinsurance.
In the context of these favourable market conditions, CWC’s review makes several recommendations to enable Guernsey to capitalise on the most promising growth opportunities.
General insurance recommendations include achieving accreditation with other jurisdictions and reviewing managing general agent (MGA) regulation. More broadly, the review argues that developing Guernsey as a hub for the global run-off market, and collecting more granular data on the insurance sector, will be widely beneficial for the future of the sector.
Specific to captives, CWC recommends the sector continues to exploit hard market conditions by understanding and promoting the role that captives can play for wealth structures such as family offices, writing for coverage gaps arising from COVID-19 exposures, and educating the fiduciary sector on how the two can collaborate.
In addition, the review suggests resurrecting Guernsey’s captive management diploma to reflect today’s diverse insurance management landscape, current best practices and new products. The review indicates that reintroducing the diploma, as well as additional roadshows, virtual events and reintroducing the Guernsey Insurance Forum, will sufficiently develop the island’s promotion of its captive and wider insurance sectors.
Similarly, CWC recommends that relevant associations design promotional materials and develop distribution strategies to support Guernsey’s ESG green and sustainable finance framework, as well as extend the scope of the framework beyond captives and ILS to include all insurers.
The review summarises: “As European market leader, there is a highly efficient captive ecosystem functioning in Guernsey, able to upscale and absorb a surge in new business.
“Increased investment in educational, promotional, marketing and sales activities by all enablers will deliver dividends through new incorporations and increased risk retention in existing captives, both of which will generate sustainable and resilient value to Guernsey.”
