The Guernsey Captive Industry – 100 years on; Why the continued success?

First published by Guernsey Finance and Captive Review in April 2022.

Guernsey has 347 licensed insurers, including 58 protected cell companies each with multiple cells established but not separately licensed. Supporting and servicing those insurers are 20 licensed insurance managers, 2 new managers being established in 2021. Whilst not all of these are engaged in the captive industry, these numbers nonetheless speak to the strength of Guernsey's captive industry in 2022. The Island remains Europe’s leading captive centre with a robust and proportionate regulatory environment, and this year Guernsey celebrates the 100th anniversary of its captive industry.

Certainly there's been renewed interest in captive insurance solutions over recent years as a result of the hard insurance market. As premiums rise (particularly for D&O and PI cover), the approach to underwriting becomes less flexible and capacity shrinks, so self-insurance becomes more attractive as a long-term risk management tool. Unprecedented events have only added further pressure to a difficult commercial market, with rate hardening seen to accelerate during the pandemic. Increased interest is now translating into new business, whether from prospective captive owners looking to launch new captives, or existing owners looking to make greater use of their captives to bridge unacceptable coverage gaps in commercial policies and write new lines of business.

At Mourant, we've seen a number of clients looking to dip their toe into the self-insurance market via cells of Protected Cell Companies (PCCs) or Incorporated Cell Companies as an alternative to a standalone captive. 25 years after their creation, use of PCCs is more popular than ever due to the Guernsey Financial Services Commission (GFSC)'s fast-track scheme for pre-authorisation of captive insurance cells. New cells in an established PCC that is owned by a licensed insurance manager can be authorised in as little as 48 hours, so a cell captive is a viable option right up to renewal. Under Guernsey law it is possible to convert an incorporated cell or a cell of a PCC into a stand-alone, non-cellular captive should the owner ultimately prefer.

Clients and their advisers are particularly interested in regulatory capital requirements that may apply to a new captive, whether standalone or cellular. Guernsey's regulatory regime is less prescriptive and more flexible than Solvency II , distinguishing between different classes of insurer (including separate requirements for a fully funded special purpose insurer) and placing proportionate regulatory burdens on each. Likewise, Guernsey's economic substance regime is robust (Guernsey achieving whitelisting from the EU, a position which some major competitor jurisdictions failed to secure), and Guernsey's insurance industry has demonstrated a track record for managing captives in a manner consistent with the substance regime.

It remains true that in deciding where to locate a captive, good management infrastructure is a significant factor. The high quality of professional services available and the jurisdiction's reputation as a top international finance centre are a tick in the box for Guernsey when it comes to choice of domicile. Speed to market is also key and in addition to the fast-track scheme Guernsey captives can make changes to retentions, reinsurance and fronting arrangements and can add new lines of business, all without needing to await any approval from or provide any notification to the GFSC. As a regulator the GFSC has been quick to adapt, encouraging captive boards to confront the impact of the ongoing pandemic (both in terms of potential claims and business continuity) and introducing a requirement under the Code of Corporate Governance for board's to consider the impact of climate change on the firm’s business strategy and risk profile, and to make timely related disclosures, where appropriate.

The Island remains innovative and recently achieved a world first with the creation of an Environmental Social and Governance (ESG) framework for insurers developed by the Guernsey International Insurance Association, the representative body for risk management. The framework requires participants to:

• embed ESG within their decision making and governance structure;

• contribute to achieving the sustainable development goals via the risks underwritten and the investments held; and

• publicly disclose how they have met the framework’s requirements.

Participants can apply a third-party accreditation process using ESI Monitor, a Guernsey-based ESG benchmarking firm, to independently assess and grant the kitemark to those who meet the criteria.

Further, bespoke insurance solutions are on offer. We have seen several high-profile UK companies, such as BT and Towers Watson, set up arrangements with Guernsey captive insurance companies to manage longevity risk in their defined benefit pension schemes. The pension scheme (and thus the employer) can limit its exposure to increased life expectancy by entering into a longevity swap with the Guernsey captive. This works by the scheme funding benefits up to an agreed cap (based on assumed life expectancy of the scheme members), with the captive assuming liability for any excess payments in return for a pre-agreed premium. The captive can then access the global reinsurance market to reinsure some or all of the risk.

In our view it is easy to see why, 100 years on, the Guernsey captive remains an appealing option for anyone wanting to own their risk management and, based on the pipeline we have seen, the future looks bright for the Guernsey captive for many years to come.