Year of the captive

The relationship between Guernsey and China, going strong since 2007, took a giant leap forward last June when the Guernsey International Insurance Association and both the China Captive Alliance and Kashgar Government came together in a bid to further develop China’s captive insurance market.

Since then, a further two memoranda of understanding (MoU) have been signed with China, vindicating the island’s continuous representation in the country over the last ten years.

The first MoU was an agreement to facilitate business through an arrangement between the Guernsey and China insurance industry regulators.

This firstly set out the guidelines for cooperation, which include the requirement for both supervisory bodies to have a specific point of contact for communication between the organisations; the types and timing of requests for information; and the respect for a public-interest test.

The second agreement, with the Beijing Airport Economic Core Zone, encourages cooperation in the areas of captive insurance market development, financial innovation, and international information exchange, in order to promote the viability of the Chinese captive market and wider communication between China and the global captive industry.

According to Dominic Wheatley, CEO of Guernsey Finance, China opening up its insurance market has been a “slow burn but ultimately an exciting outcome”.

Wheatley explains that Guernsey Finance has always maintained the value of being in the region, and will continue to do so.

He says: “We’ve put in the hard yards, quietly maintaining a footprint in China for the last decade, so these signs of the imminent maturing of that relationship through the internationalisation of Chinese corporates is very positive.”

Although captives are well-established tools used by companies all over the world, their use has historically been limited among major Chinese corporations. The reasons behind this are not difficult to see, notes Wheatley.
He explains: “As most assets and corporations have been publicly owned in China, the government has simply assumed risk and losses have been 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 greater international outlook has seen two significant trends: the emergence of private sector corporations; and the increasing privatisation of government-owned companies.”

China has technology on its side. The rate of its progression and adoption of sophisticated techniques is faster than outsiders expected and, according to Wheatley, is set to accelerate even more over the coming years.

Wheatley suggests that this innovation 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 around a potential agreement between the CIRC and the Guernsey regulator, which should enable further 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,” Wheatley says.

Guernsey started broadening its presence in Asia with Guernsey Finance’s 2007 appointment of Wendy Weng as its first Chinese representative in Shanghai.

Wheatley notes that Weng has been “highly instrumental” in encouraging the development of captive technology in China.

Most recently she has overseen the delivery of a series of educational seminars introducing local practitioners to the pending Common Reporting Standard requirements.

On the back of her success, Guernsey Finance has extended its presence in the region further, appointing Christopher Chan as its first Hong Kong representative earlier this year.

Chan is leading Guernsey’s promotional efforts across the wider Southeast Asia region, particularly introducing family offices and fund managers to the vehicles and structures most commonly developed in Guernsey.

But it’s the island’s captive insurance expertise—it is the home of the protected cell company—from which Guernsey Finance believes China will benefit most.

Chinese companies will able to develop global programmes based around Guernsey captives, and Chinese captive owners will able to make use of their access to expertise in other classes, taking advantage of soft-market multi-line capacity in the London wholesale markets, employee benefits, casualty, and emerging risks such as cyber.

According to Wheatley, Guernsey can offer China and Chinese corporations advice on non-conventional programme designs, risk transfer pricing, and detailed terms and conditions.

Guernsey Finance maintains that the island’s robust governance, its regulation and the substance of its insurance community “will ensure captive arrangements are respected by international regulatory and tax authorities, and work in harmony with the non-captive elements of insurance programmes”.

Guernsey will benefit not only in terms of new captive business, but also in terms of developing its understanding of Chinese business and corporations, and their risk environment and attitudes to risk and risk financing.

Wheatley says: “Of course, multi-domicile captive strategies are not new but they did take decades to develop elsewhere. It is a measure of China’s ability to adopt technology quickly that just a few years after establishing its first captives it is already looking to stretch the boundaries of captive strategies.”

He adds: “The future for captives in China is secure and is coming quicker than you may think.”
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