Guernsey’s strength as a captive domicile has been decades in the making, with the country’s first captive being established in the 1920s...
Guernsey’s strength as a captive domicile has been decades in the making, with the country’s first captive being established in the 1920s. It stands as the number one captive jurisdiction in Europe and the fourth worldwide, licensing 99 new captives in the year ending March 2014 alone. Despite this established industry, Guernsey is still driven by looking for solutions to what clients require.
Kate Storey, counsel in the corporate and commercial department at Appleby, comments: “Guernsey pioneered the protected cell company (PCC), in which the assets and liabilities of each cell within the company are segregated by law, and this structure has been widely used with great success in the insurance sector. We are now seeing a trend towards Guernsey’s incorporated cell company (ICC), as the legal segregation offered by each cell being a separate company is perhaps more easily understandable for clients from some jurisdictions.”
Guernsey’s ICC is also proving increasingly popular for a range of insurance structures, including captives, rent-a-captives, transformers and insurance-linked securities (ILS).
Storey states that, in the last 12 months, there has been a massive increase in enquiries regarding ILS structures. Although these vehicles have traditionally been done out of Bermuda, there has been a shift emanating from London law firms and sponsor insurers to begin focusing on Guernsey as the jurisdiction of choice for ILS.
Under Guernsey law, there is no risk of insolvency for ILS, as the loss cannot exceed the level of exposure, so the regulator is informed and the collateral is secure.
There has been interest in recent months from Europe and worldwide, and the recent Guernsey Finance-fronted ILS conference in Zurich was also “well received by major investment and insurance players”, according to Storey.
Further clout has been put behind this push through the establishment of dedicated departments. Compliance director for Heritage, Martin Le Pelley, says: “The Guernsey International Insurance Association (GIIA) and Guernsey Investment Fund Association (GIFA) have teamed up to put together an ILS sub-group designed to explore the broader opportunities for Guernsey from a two pronged attack—the insurance market and selling it to investment markets.”
Although others such as Malta and Gibraltar have been jumping on the ILS bandwagon, compared with the likes of Bermuda and Guernsey, the EU domiciles could be at a disadvantage due to the impending implementation of the Solvency II.
Storey continues: “We worked on a major marine reinsurance ILS structure at the end of 2013, where we acted for the fronting insurer. That involved use of a Guernsey special-purpose vehicle (SPV) to act as reinsurer, with capital markets investors investing into and funding the structure. We have also recently dealt with an ILS structure for insuring lotteries risk.”
Referrals to Guernsey are common from London law firms, but sponsor insurers or companies that have captive requirements have recently been coming from Spain, the US, France and the Middle East. Appleby also recently had an enquiry from a Singapore-based captive insurer that was keen to employ ILS through Guernsey.
While the Internal Revenue Service (IRS) in the US is pursuing a crackdown on captives—Guernsey has no such worries. The UK’s revised controlled foreign company rules now allow a Guernsey-based company to make £500,000 per year in profit in a cell without having to pay tax until it is distributed.
Le Pelley explains: “The US IRS is scrutinising captives because they are so popular. I’ve often said any company that manages its risks better can make more profits, which themselves are taxable, rather than taking big risks and incurring either big profits or big losses. This makes captives more stable, if anything, from a tax revenue generating perspective.”
In second place, chronologically at least, on the list of the UK’s neighbouring captive domiciles is the Isle of Man. The island has been transacting insurance since 1980, leading the sector to become one of the major contributors to the island’s economy and amounting to around 15 percent of its GDP.
Although the country does not possess the experience of Guernsey, many feel that it is fast becoming a popular alternative.
Colin Freeman, relationship manager at Barclays in the Isle of Man, says: “It is an exciting time with interest potentially rising in the US and elsewhere. In the Isle of Man, with the euro flat on its face, our customers have a great deal of cash and have to make hard choices. There are limited choices about financial institutions they are comfortable with and what options and returns they have available.”
The Isle of Man’s legislation currently caters for pure captives, PCCs and ICCs, as well as accommodating general insurers that write third-party business. At last count there are 225 licensed insurance entities on the island, covering a range of insurance structures, which are all regulated by the Isle of Man Insurance and Pensions Authority (IPA).
On 8 May, the Isle of Man released a public consultation document, put together in partnership between the insurance sector and government, to begin the process of legislating for ILS.
KPMG Isle of Man director Simon Nicholas comments: “A number of key advisors in our industry have worked in other offshore jurisdictions, such as Bermuda, and have experience of ILS and catastrophe bonds already. The demand on the Isle of Man is coming from past, present and future clients, especially some of the larger life and reinsurance companies, that will now be able to do establish ILS entities using a regulatory framework which is appropriate for the nature of the risk.”
The Isle of Man is by no means becoming an ILS jurisdiction in the mold of Guernsey or Bermuda and, while no real business seems to be leaving, according to Freeman, the country is beginning to target onshore European domiciles that may be nervous about Solvency II.
The Isle of Man, much like Guernsey, has a more flexible regulatory regime and is hoping that the numbers will follow. The consensus is that the majority of new business has been ascribed to that factor.
Big players such as Aon, Marsh and Willis have offices on Guernsey and the Isle of Man, so they have no interest in favouring one domicile over the other. Freeman claims that the choice is more client driven, and their decisions regarding each jurisdiction’s regulations, convenience, sister companies and associations are more likely to swing the vote.
Vice president of treasury and brokerage at Barclays in the Isle of Man, Peter Downey, says: “Given how cash heavy the captive market is in the Isle of Man, there are two elements to consider. Global events such as the projected Bank of England and Federal Reserve interest rate hikes over 2015 should factor into captives’ plans, in terms of how they position themselves for these market events. Secondly, captives need to decide what they want from their policy and what they want to achieve in terms of liquidity requirements.”
Practitioners on the island of Jersey are keen to develop the country’s fledgling captive industry on the back of its other, more established sectors such as banking and investment.
Although the legal infrastructure and regulatory framework to transact international insurance business has existed for many years, the captive industry is yet to be prioritised.
Richard Packman, managing director of Vantage, confirms: “Jersey is a little behind Guernsey and the Isle of Man in terms of numbers of clients at the moment. We are working to put Jersey on the map as far as recognition for establishing captives or transacting alternative risk management structures are concerned. Regardless, everything is here and ready to be used, it’s just attracting businesses to make use of the skillsets that are already here.”
Aside from Vantage, others that have an interest in developing the insurance sector have generally been law, audit and other consultancy firms—though it remains far from their prime focus.
The regulation and legislation on the island is similar to neighbouring Guernsey, while similar FATCA-esque agreements with the UK.
The island’s cell company legislation also means that it could accommodate ILS, as it could treat them similarly to a segregated accounts company. Despite this, there remains a shortage of clients, and the ones in the pipeline have generally been sourced through coincidental or personal connections.
Packman continues: “Business is slowly picking up. Vantage currently has a very small number of captive clients but we are looking to develop through the other contacts that we have. Vantage is looking to market our independence from the big broking firms, which will be our USP, much like Heritage did in Guernsey before their acquisition by Gallaghers.”
“Historically, Jersey’s captive sector has been more reactive than proactive in terms of attracting new insurance business. Work is now underway to turn that around and I think Jersey has a good chance to build up a solid block of insurance business.”
