Guernsey captives – an alternative risk management solution
15 January 2015
Dominic Wheatley, Chief Executive of Guernsey Finance, explores how the Island’s captive insurance specialists can provide risk managers with an alternative solution for their company’s insurance programmes.
Risk managers might be unaware that their company’s insurance programmes could be enhanced, including by being more cost effective, through the use of a captive insurance company.
A captive is an insurance company which is usually formed for a specific purpose, primarily self-insurance. It is called a ‘captive’ because, in its purest form, it is set up by its owners only to insure the risks of its parent and/or fellow subsidiaries. These can be established as either direct-writing captives, who then use a third party reinsurer, or as reinsurance captives, where a fronting company (conventional insurer) acts as an intermediary. In either case, the major distinction from using the conventional market is that both the premium and risk are captured within the structure, allowing captive owners to benefit from any resulting underwriting profits. The benefits of captive insurance in comparison with insuring through the commercial market include:
- The insuring of unusual or catastrophic risks or multiple small risks
- Avoiding paying large overheads and profit margins
- Premiums relate to the insured’s previous claims record
- Direct access to the wholesale reinsurance market
- Benefit from the investment return on retained premiums
- Retention within the group of the excess of net premiums over claims
- Taxation efficiencies – the payment of insurance premium is deductible in arriving at profits, and receipt is at the group’s offshore captive
- Improved risk management and understanding of the cost of risk
Captives can be established through conventional limited companies, protected cell companies (PCCs) or incorporated cell companies (ICCs). The cell company concept was pioneered in Guernsey when, in 1997, it introduced the PCC.
A PCC is a company made up of a core and individual cells. Each cell is distinct and therefore the assets and liabilities of each are ring-fenced. This legal segregation ensures that no claim against one cell will be covered by the funds from another.
The ICC, like the PCC, has cells but, in this case, the cells are separately incorporated and distinct legal entities. This offers flexibility in terms of an individual cell being able to migrate away from the main structure, to convert to a stand-alone company and, potentially, to amalgamate or merge with other incorporated entities. That said, Guernsey is also set to make an innovative amendment to its company law to permit similar for the cell of a PCC.
Cell companies offer the advantage of one parent being able to write different lines of business into individual cells. They also provide the possibility of third parties being able to own a captive and allocate individual cells to different clients. This latter point means that captives are no longer the preserve of large international organisations. The ability to take a cell of an existing structure – rather than establish an entirely new, conventional limited company – has distinct benefits, such as flexibility and cost efficiency that, for small to medium sized businesses in particular, makes captive insurance more viable.
Guernsey has an experienced, innovative and professional risk management sector specialising in captive insurance.The first captive was established in Guernsey in 1922 and, today, the island is home to the major multinational captive insurance managers, such as Aon, Artex, JLT, Marsh and Willis, as well as independent, boutique providers.
Together, they service more than 800 licensed international insurance entities, including captives from major companies such as BP, BHP Billiton, Next, Marks & Spencer and Tesco, as well as UK government-related organisations – for example, Network Rail and Transport for London.
Guernsey is the largest captive insurance domicile in Europe and number four globally. This strength is underlined by the fact that approximately 40 per cent of the leading 100 companies on the London Stock Exchange with captives have them domiciled in Guernsey. Indeed, a significant majority of the international insurers licensed in Guernsey have their parent company located in the UK. However, the island’s insurance sector is truly international. Firms from across Europe, the US, South Africa, Australia, Asia, the Middle East and the Caribbean have all established captives on the island. A major draw is the fact that Guernsey pioneered the cell company concept in 1997, when it established the PCC, and has since also introduced the innovative ICC. This means that the island has unrivalled experience and expertise in cell company structuring.
In addition, Guernsey is not within the European Union (EU) so is not required to implement its directives, including Solvency II. The island is not seeking equivalence with Solvency II because its requirements are not proportionate to the risk levels within many of its insurance and reinsurance vehicles. However, Guernsey continues to adhere to the insurance core principles of the International Association of Insurance Supervisors (IAIS), which provide proportionate regulation to the specialist insurance market.
Guernsey provides an environment in which captive insurance can flourish in assisting risk managers to enhance their insurance programmes.
An original version of this article was published in Risk Management Professional, January 2015.Back to News
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