Innovation and evolution continue to be at the heart of Guernsey’s captive insurance market.
Innovation and evolution continue to be at the heart of Guernsey’s captive insurance market.
Staying ahead of the curve is why the island remains Europe’s leading captive insurance domicile. This was evidenced at our recent Guernsey Insurance Forum in London, which attracted an audience of nearly 200 and highlighted how Guernsey as a jurisdiction is regarded as a thought leader to be followed by the international insurance community.
One of the key takeaways from the event was the prediction that growth in the captive insurance market is going to be driven by intermediaries and brokers establishing vehicles to aggregate the risks of their individual customers. The vehicles, referred to as producer-owned reinsurance companies (PORCs), enable customers that may be too small in their own right to go down the captive or protected cell company (PCC) route to be grouped together into a larger programme in order to enjoy the benefits of the captive and reinsurance markets.
Mark Helyar, counsel at Bedell Cristin and who was on one of the panels, said PORCs were the major area of growth in the captive sector at present. Helyar explained: “All of the Coca Colas of this world, the BPs and the Shells and everybody, have got their captives already, so if you want to get into another sector, then it needs to be in small and medium-sized enterprises (SMEs).”
He also revealed at the event that Guernsey had drafted a set of rules to provide extensive guidance for its special purpose insurers (SPIs). A consultation paper seeking comment from the marketplace has been issued, with the rules themselves expected to go live before the end of 2016. Helyar suggested the new SPI rules would put Guernsey ‘on a level playing field’ with other insurance-linked securities (ILS) domiciles.
Another panellist at the event, Mark Cook, director at Willis Towers Watson, also drew attention back to innovation in Guernsey by discussing the rise of captives with employee benefit risk. Cook noted that there are now approximately 100 captives funding employee benefit risk, with most of those launching over the last five years. Cook said: “It is not just traditional risk products and health products we are talking about, stop-loss products, medical programmes and so on.”
Longevity risk
Of course, Guernsey’s reputation for innovation is well-known, but it was further illustrated in a whitepaper, Longevity Risk Market Comes of Age, which was written for Guernsey Finance earlier this year. The whitepaper examined how longevity risk—the risk that people live longer into their retirement—had become a growing burden, particularly for closed defined benefit schemes or final salary schemes, but that Guernsey’s expertise in the area of captive insurance and its utilisation of cell structures was offering a solution.
Guernsey made its name in this area when the British Telecom Pension Scheme (BTPS) entered into a £16 billion transaction to transfer a quarter of its longevity risk to Prudential Insurance Company of America. In order to transfer the risk to Prudential, BT established its own captive insurer, a Guernsey-based incorporated cell company (ICC), allowing it to access the reinsurance market directly without paying a bank or insurer to act as an intermediary. The deal was significant, both in terms of its size and in its innovative use of an ICC structure.
In the whitepaper, Paul Eaton, new business director at Artex Risk Solutions, explained that longevity had been hedged by transferring the risk for many years, but that the use of captive insurers was a recent phenomenon.
Eaton said: “Historically, commercial insurance companies or banks would be the intermediaries and they would access the reinsurance market to find capacity. What’s happened over time is that the loading intermediaries applied to the transaction have led some schemes to look for a more cost-effective way of reaching the reinsurance capacity, and this is where establishing your own insurance company comes into play.”
The ICC has subsequently become the structure of choice. Each ICC has a core that is owned by the sponsor of the ICC, and surrounding the core are a potentially unlimited number of cells, each of which can be set up for separate captive-type businesses and owned, or licensed, by other parties. The whitepaper explains that the preference for ICCs had been instigated by reinsurers requiring absolute certainty that there is no contamination risk between cells.
“Pension schemes are also aware they may require additional longevity transactions in a number of years’ time, as their portfolio matures, so it helps to have a vehicle that is already in place to which you can add further cells,” Eaton explained.
The benefit of going down the captive, or ICC, route, rather than using an insurer or bank to access the reinsurance market, is that it is easier to do business with just one reinsurance counterparty. This was something explained by Ian Aley, senior consultant at Willis Towers Watson.
Aley commented: “If you are a commercial organisation with multiple product lines that expects to write more business in the future, you probably want to spread your credit risk limits thinly across a number of reinsurers. But if you’re a pension scheme hedging your longevity risk to a reinsurer, you’re very comfortable to take an acceptable level of credit risk with any one reinsurer, and the same applies in the other direction. One of the advantages of the captive is you can access the most efficient reinsurance price without having to take an average of three to six—which bumps the price up.”
Chinese recognition
Guernsey’s leading position in Europe has led to others further afield taking note and looking to the island for its expertise and guidance. For example, in June this year Guernsey signed two agreements with the Kashgar government and the China Captive Alliance (CCA).
Kashgar, located in the Xinjiang autonomous region in northwest China, has become the dedicated centre for the country’s growing captive insurance sector, while the CCA is the most authoritative professional captive institution in China. Both the Kashgar government and the CCA were eager to establish ties with Guernsey due to the island’s long and established history in captive insurance and reputation for innovation, which includes pioneering the cell company concept with the introduction of the protected cell company.
The Kashgar agreement, which was signed by Guernsey Finance’s Asia representative Wendy Weng at the first ever Asia-Europe Captive Summit in Kashgar on behalf of Guernsey’s government, provides for cooperation between the two jurisdictions in the areas of captive insurance market development, financial innovation, international communication and information exchange in order to promote the viability of the Chinese captive market and communication between China and the international captive insurance industry.
The CCA agreement with the Guernsey International Insurance Association (GIIA), the representative body of both Guernsey insurers and Guernsey insurance managers, sets out a similar statement of intent.
Captives are well-established strategic tools among the world’s top companies with the vast majority of them using captives for a variety of purposes and across the full range of corporate risks. However, to date, their use has been limited among major Chinese corporations.
The reasons for this are not difficult to see. As most assets and corporations have been publicly owned in China, the government has simply assumed risk and losses met out of current revenues. Not surprisingly, insurance was not recognised as necessary by managers or their public sector shareholders. However, the move toward a more mixed economy, and a more international outlook, has seen two significant trends: the emergence of private sector corporations and the increasing privatisation of government-owned companies.
As ever in China, the rate of progress and adoption of sophisticated techniques is faster than outsiders expect and is set to accelerate over the coming years. The first tentative steps to explore captives have involved non-Chinese assets and taken place in traditional captive centres. However, the attention is now switching to domestic risks and establishing a captive centre in mainland China.
All of this progress is being encouraged and facilitated by the China Insurance Regulatory Commission (CIRC) and China’s other financial regulatory bodies, and is enthusiastically endorsed by the People’s Bank of China. Discussions are already underway towards an agreement between the CIRC and the Guernsey regulator, which should enable operational and financial efficiencies and provide enhanced transparency and joined up regulatory oversight.
These developing arrangements are a major step forward toward China’s goal of developing its own domestic international insurance expertise and a mature insurance industry, as well as increasing its international insurance relationships.
For Guernsey, they represent a significant broadening of the island’s growing business relationship with China, which stretched back to 2007 when we appointed our first Chinese representative, Wendy Weng, in Shanghai. Weng has been highly instrumental in encouraging the development of captive technology in China and broking the various relationships that are now helping shape China’s captive future.
Guernsey’s union of an innovative industry and intelligent regulation has underpinned the evolution of its mature international insurance sector and is why those in China and elsewhere regard the island as one of the leading insurance domiciles in the world, and one they want to work with. Recent developments only go to reinforce that fact.
