Guernsey, the largest captive domicile in Europe, has a reputation for putting solid infrastructure in place to support its captive business, and for innovation when it comes to captive solutions. But, according to experts, the captive market in Guernsey saw slow growth during 2015.
In recent years, soft insurance markets have slowed the growth of traditional captive business, according to Martin Best, managing director of the Willis captive management business in Guernsey, but the domicile continues to develop new and innovative captive solutions to compensate.
Mark Helyar, partner of Bedell Cristin, adds: “Captives have been maintaining numbers by new additions matching run-offs in recent times, but this is more a reflection of a soft market.” He argues that captives and other types of risk transfer and self-insurance will always have strategic benefits.
Best explains that the insurance-linked securities (ILS) business in Guernsey continues to thrive, and the domicile is developing a reputation as a centre for reinsurance. The development of pensions longevity business presents an exciting opportunity, he adds.
In October 2015, Guernsey was named as a go-to jurisdiction for longevity risk transactions. John Coles, head of operations for the BT Pension Scheme, explained that Guernsey was used for BT’s £16 billion longevity risk transfer because it “has a good legal framework and a good regulatory environment”.
Guernsey’s utilisation of the incorporated cell company structure was also the most appropriate and practical way of meeting the needs of the transaction, according to Coles.
He said: “The regulator and all of the companies in Guernsey recognise the business activity. They understand the risks and that is very helpful. Guernsey is open for quality business.”
Ian Aley, a pensions funding expert, explained that using a captive to hedge longevity risk can provide a lower cost base and guarantee a ‘principal to principal’ approach between the pension scheme and the reinsurance market.
He said: “The capital that is applied to the captive you can think of in terms of a liquidity issue rather than paying someone else capital. So you still own the captive; you still own that capital. You’re not going to be able to use it for many years, but it’s still there. So, there’s a reason of cost.”
Best adds on the topic: “This is a very conventional use of captives to access reinsurance markets, which represents a win-win for captive owners, in this case, pension fund trustees, and reinsurers, typically life reinsurers”.
Peter Child, director of Artex Risk Solutions in Guernsey, says that pure captive growth has been fairly static over the last few years due to a combination of the ongoing soft market and the maturity of the UK captive market, which he says is Guernsey’s primary source of captive business. He argues: “The captive concept remains sound, and given a change of conditions, there is every reason to believe that the captive market can grow again.”
Although 2015 has seen slow captive growth, Ian Morris, partner and head of insurance services at BWCI Group, believes that the Guernsey market is likely to see progress in 2016 and suggests that there will be growth as some entities move out of the reach of Solvency II, which came into effect at the beginning of the year. He reaffirms that new areas, such as captives being used for longevity swaps for pension schemes, will also help to increase growth in the Guernsey market.
Helyar says that while the exact statistics have not yet been released by the regulator, Bedell Cristin’s 2015 suggests that business in Guernsey has been good thanks to these new areas. He says: “Our own involvement in the market would suggest another substantial increase in assets under management, premiums and number of licensees in 2015.”
Despite being outside of the constraints of Solvency II, Guernsey has moved to strengthen its own solvency and capital framework. Helyar says: “The most significant development has been the introduction of Guernsey’s new solvency and capital regime, which is more flexible and better suited towards captives.” He explains that the framework was developed in combination with the industry and has been welcomed and adopted without any significant difficulty. Morris adds that the new solvency rules were introduced in 2015 to move to a more risk-based approach.
In addition to the new solvency and capital regime, Helyar revealed that a new corporate governance regime is to be introduced during 2016, which is slightly less prescriptive than in previous years. He says: “The new regime will bring Guernsey’s insurance sector in line with other sectors, such as banking.”
Best says: “This will strengthen the existing corporate governance requirement, but it is not expected to have a significant impact on captives which are already well managed and governed.”
“Guernsey regulation will be very much in line with International Association of Insurance Supervisors core principles, once the new governance code is introduced, so I do not expect any changes in the current regulatory regime.”
He also expects pension longevity business to grow significantly in 2016. “The gestation period for this business is long, but there are a number of deals under discussion now which should come to fruition in 2016.”
In addition to regulation, Guernsey also expects to see further migrations of business from competitor jurisdictions. Helyar explains: “This is due to a combination of factors but also the development of new products, including investment funds, which can be licensed as insurers, but also in the way in which captives interact with the growing commercial reinsurance market. We also expect to see significant growth in collateralised reinsurance.”