Guernsey’s captive insights for 2019

23 January 2019

Leading figures in the Guernsey insurance market offer their views on prospects for captives in 2019.

State of the market

Dominic Wheatley, Chief Executive, Guernsey Finance: Recent developments in the market are reminding me of those halcyon days before the prolonged soft markets of the last 15 years. At that time there was still a market cycle – a hardening and softening of rates over a finite period which added a dimension of budget planning through the peaks and troughs to the role of a captive. But that’s not something that many corporations have worried about in recent years of ever-softening markets.

My interest was sparked not only that there were signs of hardening rates in the retro markets, but that some companies are facing rate increases for the first time in a while. And these are not distressed risks or companies in particular risk categories, but normal corporations doing normal business in ordinary buildings using routine technology. Let’s not get ahead of ourselves, but it just might be the start of a hardening market, or at least the beginning of the end of the long soft market. 

If rates do harden, a captive provides useful mitigation against increasing premium costs and coverage restrictions.

That means that 2019 must be the time to look again at captive programmes, whether increasing the use of the one you have or establishing a new one. And nowhere matches Guernsey’s unique combination of expertise, experience, market proximity, and regulatory environment as a home for your captive. 

Substance

Dominic Wheatley: During the 1990s the captive market in the UK and Europe generally had moved decisively away from tax-driven captive structures and programmes into the modern era of captives as tools of strategic risk management and efficient corporate risk financing. Recent moves against 831b structures in the USA seem to indicate that they are starting to pursue the same agenda. 

Guernsey’s captives industry responded by upskilling in key underwriting and claims expertise, creating the substance that remains a key differentiator of our industry to this day. We now have an insurance community of some 1,000 people involved across most of the broader insurance sector.

Our world class regulatory regime applies global regulatory standards on a proportional risk basis, is designed to meet the particular needs of captive business and avoid the excessive capitalisation requirements of regimes focused on the systemic risks and policyholder protection concerns of large-scale commercial insurance.

Richard Le Tocq, Chief Executive Officer at independent insurance manager Robus Group: Given Guernsey’s solid experience in captive insurance it is ideally placed to respond to, and demonstrate compliance with, the emerging substance requirements. It would appear that regulators within Europe are taking slightly differing stances, and it will be interesting to see how this manifests itself in 2019 and whether any arbitrage situations develop.

Guernsey’s proportional approach to regulation, along with the proven model of outsourcing to specialist insurance managers, has successfully demonstrated mind, management and control in a jurisdiction with an excellent reputation. Careful consideration of what resource is actually required to run a captive insurance company should not be lost in the theory of what a European body believes is best practice from their experience of large international insurers’ operations. The nature, scale and complexity of operations must be taken into account.

Dominic Wheatley: As the nearest captive jurisdiction to London we offer unique accessibility and proximity to the world’s largest insurance centre. Our relationship with the London market is close, something evidenced by the presence of a number of the larger broking houses, alongside local independent insurance managers, to maximise the value your captive delivers for you.

Malcolm Cutts-Watson, Managing Director, Cutts-Watson Consulting, and veteran of the Guernsey captive industry: Guernsey, as a domicile with demonstrable substance and a fitting governance framework, is often copied, but never replicated.

Guernsey’s global market share

Malcolm Cutts-Watson: Guernsey’s market share among global captives is growing despite intense competition. The opportunity is there to harvest markets in regions further afield, if you make the captive proposition attractive and become a first mover. Guernsey’s decision to invest in the China and Hong Kong market looks a forward-looking and strategic decision.

Of some 6,500 captives worldwide, the US and Asia are the only regions showing a net increase in captive vehicles, and we should not underestimate the importance of Asia Pacific going forwards.

Future trends

Richard Le Tocq: The insurance industry can’t ignore emerging technologies, and the growing threat of cyber risk is a trend I expect to see continue and represents an opportunity for captives. Use of captives to write cyber liability is one of the fastest-growing developments.

Malcolm Cutts-Watson: I expect to see the rise of micro insurance to deliver sustainable economic growth in emerging territories, such as the recent example where parametric insurance protects the crops of low-income farmers in Sri Lanka, all delivered via mobile phone apps, with a low weekly premium, low frictional cost, and immediate and certain payment after a natural disaster.

A captive platform, established in Guernsey, is ideal to run such programmes and could access capital markets for cheaper capacity.

Richard Le Tocq: For more than a decade Guernsey has enjoyed success in running employee benefits in captives, and there are a number of conversations ongoing about expanding this globally in a regulated environment. Alternative risk finance has also resurfaced and major carriers are now promoting ART-style solutions to deliver transfer pricing that meets BEPS scrutiny.

Malcolm Cutts-Watson: Premium volume is growing, even if captive numbers have taken a slight dip, which shows that captive business is not dying, in fact average premium per captive is increasing. A recent study has shown that nearly half of all large corporate claims are currently disputed by insurers, and on average take three years to resolve, with settlements around 60% of initial estimated values.

If you ever needed a reason why captives remain relevant, this is it. Captives deliver greater certainty of coverage and reliable claims settlement.

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