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2020 – a year of challenge and increased sophistication for captives

15 January 2021

Written by Peter Child Artex

Peter Child, Head of European Operations at Artex and its Managing Director in Guernsey, and chairman of the Market Development Committee of the Guernsey International Insurance Association (GIIA), gives an overview of operations in Europe’s leading captives jurisdiction over a year dominated by a hardening market and Covid-19.

A challenging but incredibly busy year for captives in Guernsey.

Guernsey largely overcame one massive challenge, in effectively eradicating Covid-19 from the island within a couple of months of lockdown, but while we as a global industry still have huge Covid uncertainty, one thing we can be sure of is that the use of captives is going to become increasingly sophisticated in the future.

While a large increase in interest for captive formations in Guernsey has not yet translated into multiple new structures being established, we have certainly seen clients with existing captives ramping up use of their structures, as they consider the application of optimal risk-financing strategies

The level of interest in Guernsey throughout 2020 has been massive. So much so that the volume is a challenge for us to deal with.

On the other hand, conversions just have not hit the same levels we have seen over the years. I think that is because captives should not be seen as a ‘magic bullet’ in risk management.

We have found that lots of people have heard something about captives. When they see their premiums rise by a multiple of five or six, they might start to think about a captive, looking for a short-term benefit to allow them to cope with the vagaries of the insurance market.

But that has never been the case – a captive has always been a medium to long-term strategic investment of both time and money. So if you are after a quick fix, captives will not necessarily work for you.

The market has undoubtedly changed from that seen in the 1990s and previous hardening markets, where there was a regular flow of new business.

But now, given that we think we might be in a so-called ‘new normal’, rather than a standard hardening market cycle, trade moves rather differently.

Guernsey saw a rise in captive formations in 2019 to 11, more than double the figure recorded in 2018, which was the island’s best performance since 2016.

We are expecting a further increase in 2020, and into 2021, despite delays caused by Covid-19 lockdown. Guernsey has more than a third of all captive insurance business in Europe, with more than 300 structures active in the island.

We have seen that there are still a large number of captives being formed, with larger captives going through the feasibility process or the set-up process as I write. I also think, and fully expect, that formation activity will really speed up over the next few months.

We have also seen an immediate boost from the introduction of a pilot scheme for pre-authorisation for insurance cells from our regulator, the Guernsey Financial Services Commission.

It has been introduced in response to the huge increase in demand, was immediately used within a few days of introduction, and demonstrates a flexible approach to regulation, enabling buyers to increase their control over difficult renewals during the current market cycle.

When Covid uncertainty reduces, we expect that will enable people to make the longer-term investment decisions they need to make when setting up a captive.

We are certainly moving to a place where new captives will be comparatively sophisticated compared to their predecessors from the 1980s and 1990s. Those captives that are already established will start doing more and different and interesting things, and the captive industry is going to turn into a much more sophisticated financial services offering than it ever has been before.

A survey of Airmic members, taken before this autumn’s Airmic virtual conference, revealed that two-thirds of risk managers and insurance buyers are now considering captives in response to the hardening market.

More than a third of those already with a captive were now using their captive for increased retentions, and more than 30% were writing new lines of business, with directors’ and officers’ cover, an area with particularly high increases, bringing new thinking to the captives market in what can be a complex area.

Across the board the survey found extreme price increases, with 95% of risk managers experiencing price rises, 85% reduced capacity, and 66.7% an increase in inclusions from their insurance partner.

As Europe’s leading centre for captives, Guernsey has also faced the challenge in 2020 of addressing economic substance requirements in a Covid-19 environment.

That has largely been managed by pragmatism and the use of technology. Given international tax scrutiny of captives, all captive operators and owners have to be fully aware of economic substance issues, and while technology may continue to be used, the demand for physical board meetings is unlikely to decline.

This article first appeared in Captive Review, December 2020.

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