Guernsey continues to see increased interest in its captive market due to the hard market conditions. Industry participants discuss the current trends, challenges and its ongoing partnership with China
After registering 11 new structures last year — the best result since 2016 — Guernsey did also see 24 closures during the year, ending 2019 with a total of 305 captives.
The figures were said to reflect a fresh interest in captive from a change in market conditions as well as the confidence gained in Guernsey’s whitelisting for economic substance from the EU.
Discussing the year so far, Rupert Pleasant, chief executive at Guernsey Finance, suggests that 2020 is looking “very positive” for Guernsey’s captives sector.
Pleasant, who replaced Dominic Wheatley after he stepped down from his role in June, reveals that providers have already seen more formations than in 2019 and “the level of inquiries has been massive, almost too much to deal with”.
With price increases and a hardening market, James Morris, head of UK insurance and captive banking at Barclays, says the bank is seeing corporates looking at their risk financing structures, and have focused their minds rather than turning their minds against investing capital.
While interest around captives had already increased at the start of the year, the spotlight was further placed on them in light of the COVID-19 pandemic.
Paul Marquand vice-president of Marsh Captive Solutions, notes that there will be an increase in captive formations as a result of the pandemic.
Most businesses have been impacted by the pandemic and new and existing clients are looking to reduce costs in line with reductions in revenue as well as fill gaps in coverage where the insurance market is imposing exclusions.
Marquand says: “By helping to control insurance costs captives are able to make a meaningful contribution in this area.”
Meanwhile, Christina Bell, executive director and head of its insurance centre of excellence at Aon, believes COVID-19 is “likely to strengthen” (re)insurer’s resolve for rate increases as the ripple effects are felt throughout the global economy and (re)insurance market for years to come.
She adds that this impact will continue to drive renewed interest in alternative risk financing structures, “especially where the scope of cover offered in the conventional market is reduced and company’s look for new ways to manage the risk left on their balance sheets”.
Peter Carter, head of the global captive practice at Willis Towers Watson Management Guernsey, explains while the hard market is generating lots of interest in how captives can help drive better leverage with carriers, this is balanced by other corporate priorities and pressures caused by the pandemic and consequent dramatic reduction in economic activity.
He says: “Captive owners looked to release or upstream surplus capital after the 2008 slump, and there is little fat left to help in this crisis.”
With the continued hardening market, we are seeing increased interest in existing and new captives, and an increase in economic activity should extend and increase this interest.
Richard Paris-Smith, head of the Guernsey office at Willis Towers Watson, reveals that two clients who closed their captives have returned to discuss setting up new ones due to the current conditions. However, Pleasant says it’s not necessarily the pandemic driving formations, he suggests the hard market is a big factor.
He notes: “The uncertainty caused by the pandemic and Brexit is making it harder for potential captive owners to make the decision to invest in a captive vehicle at this time.”
Trends
Risks currently underwritten by Guernsey captives include employee benefits, employers’ liability, marine and aviation risks, and terrorism.
However, new risks, such as emerging cyber risks, have been reaching main board agendas, according to Morris.
Meanwhile, market cover available in areas such as professional indemnity and supply chain risks has been hardening in terms of limits, terms and price.
Morris predicts that growth will come from the formation of new single-parent captives and group-type captives. He says: “We can expect to see the number of captives in the market grow significantly.”
“The benefit of sponsored cell captives is that they provide an efficient solution for typically small to mid-size businesses, but are not restricted to those. Once a sponsored cell captive is set up, the turnaround time for adding cell business is relatively quick,” he adds.
Elsewhere Marquand suggests a large portion of Marsh’s new formation in Guernsey are for financial and professional lines.
He notes: “The current insurance market for these risks is challenging, with several insurers exiting, and those that remain are imposing rate increases.”
There has also been increasing interest in commercial insurers. Marquand says, Guernsey, as a stable jurisdiction, is seen as “a credible and cost-effective alternative” to EU domiciles, particularly with the uncertainty around Brexit.
Challenges
One of the biggest challenges for Guernsey, identified by Marquand, is for the island not to become complacent, particularly as Brexit creeps nearer.
The UK membership of the EU ended on 31 January 2020, which led to the beginning of a period of transitional arrangements, set to end on 31 December this year.
As the UK holds the potential to become Guernsey’s biggest competitor, Marquand highlights the need for Guernsey to “protect its position as Europe’s leading captive domicile”.
Pleasant affirms the efforts from Guernsey to hold its current position. He says: “Guernsey will continue to maintain the current regulatory environment that has been honed over many years to ensure that it is appropriate to the need of captive owners while maintaining at the very least the minimum criteria for insurance regulation as set out in the core principles of the International Association of Insurance Supervisors (IAIS).”
Guernsey is currently home to a third of the European captives market, according to Morris and believes its whitelisted status by the EU and OECD for economic substance puts it in good stead to compete.
He adds: “It has domicile experience, a good regulator, innovation, the experience of managers and infrastructure, and good legislation and flexibility – so I believe these elements keep it competitive. Additionally, Guernsey is supported well by a good banking infrastructure.”
Another challenge for Guernsey, which is seen across the whole sector, is the talent crisis within the captive insurance industry.
Marquand says the island must attract more “young and dynamic professionals into the industry”.
“We must pass our experience and knowledge down to the next generation of leaders,” he adds.
By embracing and investing in new technologies that help drive administration efficiencies and improve management information, Marquand explains “we will have a greater chance of attracting the brightest and best talent”.
Collaborations
Guernsey has made strides in its relationship with China in recent years, including signing a memorandum of understanding with Chinese authorities — an “essential step” for making progress in business in the country.
Last year, Guernsey Finance revealed that international co-operation agreements and Guernsey’s reputation in the market are helping to facilitate the growth of Guernsey captives with Chinese clients.
Pleasant commented on the relationship suggesting that Guernsey companies who have invested in China are seeing the benefits.
He explains: “There are opportunities for Guernsey in this market, and Guernsey has been recognised as the leading non-Asian captive domicile for the Asia market.”
Establishing new business relationships with China can take time and the pace “inevitably slowed” during the pandemic, according to Marquand.
Bell echoes the above views, stating that there has been some early success in this area with some new formations but noted that as with entering any new market “it can be a long road and these relationships take time to develop”.
She adds that development time is “something which is now harder than ever due to COVID-19 and our inability to travel out to the country”.
Future forecast
Looking at how Guernsey’s captive market will develop, Pleasant said there is set to be growth in the number of licensees, in assets under management, in gross written premiums, and the types of cover written.
He also reveals that Guernsey is also working on a framework to develop a green kitemark for our insurance-linked securities and captive platforms to take a bigger stake in environmental, social and governance (ESG) issues. ■
