Solvency II no barrier to reinsurance from Guernsey

30 June 2020

Written by Nick Bugler Wilkie Farr & Gallagher

Solvency II is a European Union directive which codifies and harmonises EU insurance regulation. It is most applicable to Guernsey when considering reinsurance, as Nick Bugler, London Partner in the corporate and finance department of international law firm Wilkie Farr & Gallagher, explains.

For a country like Guernsey, which is not equivalent and has taken a deliberate policy decision not to seek equivalence, one of the most significant areas of Solvency II concerns reinsurance.

In those cases, a Guernsey entity providing reinsurance to EU insurance company, is not, on the face of it, equivalent, so what does that mean for the cedant in terms of their own solvency capital position?

The answer depends on the nature of the reinsuring company. If that reinsurer is highly rated, then effectively the European cedant can take full credit. There will be some element of capital it will need to hold for counterparty credit risk, but for a strongly-rated reinsurer that is going to be minimal.

For collateralised re, the cedant can rely on the fact that counterparty credit exposure is really mitigated by the provision of collateral. What becomes key there, in terms of the cedant’s ability to take credit for that reinsurance, is the fact that obligations will be collateralised, and they need to take into account the form of that collateral, and how it is held.  

If held with a bank as trustee or custodian, the bank’s creditworthiness, and how vulnerable that collateral might be in the event of bank becoming insolvent, is taken into account, and a very significant amount can be taken into account in a collateralised re structure.

In our practice, we do not see people seeking collateralised reinsurance being put off going to Guernsey by the fact that Guernsey is not Solvency II equivalent.

It really means that places like Guernsey can offer reinsurance to EU cedants. The cedants obviously need to assess the vehicle and the terms on which reinsurance is provided, but they could, in effect, provide reinsurance on a services basis to European cedants.

Whether they need to be licensed will depend on the domestic laws of the member state. That is not an issue addressed in Solvency II.

While it is a lot easier in a sense for conventional reinsurers in third country deemed equivalent, that does not mean to say that reinsurance from any third country that is not equivalent is forbidden, it is not. It just means the cedant would have to take into account the nature of reinsurance and capital it might need to hold.

In our practice, we do not see people seeking collateralised reinsurance being put off going to Guernsey by the fact that Guernsey is not Solvency II equivalent.

My clients dealing with Guernsey are sophisticated entities who understand what they are entering into and they are comfortable.

Structures are available in Guernsey for enabling the efficient marrying of insurance capital with particular risks, which is hugely attractive. Guernsey is dealing with sophisticated investors and buyers know what they are getting.

Nicholas Bugler is a partner in the Corporate and Financial Services department of Willkie, Farr and Gallagher in London. He advises on a wide range of issues affecting the international insurance and reinsurance industries. He advises both insurance and reinsurance companies, insurance general agents and investors of all types. Recently he has specialised in the intersection of the reinsurance and capital markets industries.

He is ranked among the leading practitioners in the area of non-contentious insurance by Chambers UK (2020).

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