The Guernsey Insurance Forum welcomed 168 attendees to London, where its main focus was captive insurance
Banking Hall in London, a stone’s throw away from where the London Insurance market was formed 300 years ago—to borrow a fact from Aon CEO Karl Hennessy’s keynote speech—welcomed 168 attendees on Thursday 11 October for the 2018 Guernsey Insurance Forum.
For the first time at the event, the focus this year was on captive insurance, with much of the emphasis on dealing with the current and upcoming challenges the industry is facing.
“We are in the business of risk,” said Dominic Wheatley, chief executive of Guernsey Finance, in his opening speech.
“When you are dealing with risk it involves a great deal of pragmatism. Necessity is the mother of innovation and if you standstill you die in the modern environment.”
Wheatley was optimistic about the captive industry moving forward, despite the challenges ahead. He noted: “The adaptability of captive technology makes me very confident of the future of insurance and the captive industry.”
An industry of substance?
One of the challenges faced by captive insurance is the negative reputation often attributed to it due to the fact that it is closely associated with offshore locations. During the session on ‘substance in the insurance industry’, Paul Owens, managing director of Willis Towers Watson’s Global Captive Practice, suggested this misguided reputation came from a lack of understanding.
He said: “The captive industry is traditionally offshore and being offshore has a specific reputation. Many people just don’t understand it. If the captive industry is not there where would that risk be insured?”
The Organisation for Economic Cooperation and Development (OECD) and tax authorities held such views, and the panel argued that the industry needed to educate the OECD and the tax authorities so they have a better understanding of captive insurance.
Jenny Coletta, insurance tax partner, international tax and transfer pricing, at EY, suggested the OECD’s current view of captives, particularly in low tax domiciles, is “quite negative”.
She added: “If you look at lots of the work that has come out to do with [the base erosion and profit shifting (BEPS)] project, clearly the industry would never stand by that. We need to make our voice heard and we need to educate the OECD to educate tax authorities.”
“There was a recent consultation which the OECD put out to the public and they received nearly 1,500 pages, a lot of which talk about the value of captives, why they are so important and that they are not just there for tax reasons, they’re there for valid commercial purposes.”
“We need to better educate tax authorities in my view.”
John English, CEO of Aon Captive and Insurance Management, suggested that “far more” interaction and dialogue was necessary with the OECD.
He said: “I think it is a question of dialogue and getting the point across, which I think we have failed to do so far.” According to Coletta, the OECD is “genuinely open to having these dialogues”.
Owens was in agreement and suggested that he was optimistic that dialogues with the OECD could be successful.
He said: “There is optimism that the OECD will regroup and understand what we do.”
Owens was also optimistic at the role captives could play in the “new world” following a “fourth industrial revolution”. Responding to a question from a delegate about the impact of artificial intelligence and emerging technology Owens’ said “the problem is we don’t know what we don’t know”.
He explained: “There is going to be a massive shift. I am a strong believer in the fourth industrial revolution and it is coming down the track pretty quickly.”
Owens continued: “There is a completely different economy exploding underneath the traditional one. This is where the traditional insurance market and captives can come together to write solutions. The dynamic is changing to a new world of shared economies and shared driving and the captive world can be part of that.”
According to Owens, advancing technology will “make things easier to process and transact”, which will “allow the industry to shift into more focus on brain power”.
The ‘B’ word
It would have been impossible to host a conference in London without at least touching on Brexit, the British government’s painful attempt to stumble out of the EU.
However, the Guernsey Insurance Forum’s panel session on the topic provided one of the most insightful breakdowns of the issue and its possible impacts that I have witnessed.
One panellist, Theo Leonard, director of government relations at Barclays, explained that it would be five to 10 years before we know what the future agreement will look like for the UK, as the current negotiations just deal with the transition period and have not scratched the surface in terms of future relationship.
Fellow panelist Suzy Awford, head of regulatory and government affairs, AIG Europe, was in accordance with Leonard and added that there was currently little interest from the European side in talking about the future relationship.
She added that all the focus was on the withdrawal agreement and with so many issues needing to be grappled first “there was little focus on financial services in the minds of those discussing Brexit”.
The feeling was apparently mutual from the captive industry’s perspective, as according to Will Thomas-Ferrand, another of the panelists and the international practice leader at Marsh Captive Solutions, Brexit is not top of the agenda for captive insurance.
Leonard emphasised that despite the current uncertainty surrounding Brexit “business need[s] to plan for the eventuality that the UK ceases to be part of the EU next March.”
Thomas-Ferrand suggested that there was still time for captives to begin preparing a strategy to deal with the possible issues caused by Brexit.
He explained: “Assuming the captive will have a post-Brexit issue, which some may not, I don’t think it is too late. Fronting can be arranged fairly quickly, that is not a lengthy process.”
“It does take some time to look at all the options but we have got five months until March 2019, when the UK is scheduled to leave the EU, which is plenty of time to look at the different options.”
“Enactment of such a plan may not necessarily need to happen until after the transition period, [which is scheduled to close at the end 2020] although there is uncertainty surrounding that.”
Thomas-Ferrand also noted that he had seen “an incredibly small amount” of captives redomiciling ahead of Brexit. Wheatley said: “Captives are there as a servant of the client and therefore the effect of Brexit will very much be driven by its effect on the client”.
Guernsey
Turning focus to Guernsey itself, Wheatley commented: “The reality is that the Guernsey insurance industry is thriving and responding to challenge and change with innovation, and seeing a lot of opportunity.”
According to Wheatley, the island remains “a centre for significant excellence, that has a lot of experience”.
“We have seen a lot of these issues before and we are good at dealing with new and emerging issues.”
“I think this is a specialist centre of excellence and it is the equivalent of Silicon Valley for captives and offshore insurance.”
In closing
Addressing the debate over whether or not captives were in decline, Thomas-Ferrand referred to Willis Towers Watson’s statistics on captives.
According to the statistics, the premium going into captives has grown by 25 percent compared to the previous year and by about 55 percent compared to four years ago.
He commented: “So, captives are obviously being used and I would challenge that they’re in decline.”
In his concluding comments, Wheatley said Thomas-Ferrand’s statistics showed the level of captive growth in recent years was “extraordinary” and that it was clear and resounding evidence that captives were not in decline.
Wheatley said he took heart from the fact that Brexit was not on top the agenda for captives.
He explained: “I would be depressed if Brexit was at the top of the agenda for captive boards. I think we should be getting on with business, and indeed we are.”
He noted that the greatest impact of Brexit on captives would likely be its effect on their parent companies.
“Captives are there as a servant of the client,” said Wheatley. “Therefore, the effect of Brexit will very much be driven by its effect on the client”.
