Guernsey this year celebrated 100 years of being an active captive domicile. Since Commercial Insurance Company Limited registered the first captive on the island in 1922, the domicile has built itself up to become one of the most popular in the world, with over 300 captive structures today. To recognise Guernsey’s landmark year, Captive Review spoke to Caroline Bradley, co-director of the Authorisations and Innovation Division at the Guernsey Financial Services Commission, to understand how it has maintained its popularity for all these years.
Captive Review (CR): What have been the major developments in Guernsey as a captive domicile over the years?
Caroline Bradley (CB): The major developments, from a regulatory perspective, include the Insurance Business Law in 1986 followed by the formation of the Guernsey Financial Services Commission in 1988.
The number of insurers, which were mainly captives at that time, grew steadily during the 1990s. The commission has been a member of the International Association of Insurance Supervisors (IAIS), the global standard setting body for supervision of the insurance sector, since its formation in 1994 and our legislation and regulations have evolved in line with international standards.
Guernsey was the first jurisdiction to introduce protected cell company legislation in 1997 and this proved to be significant in the development of the insurance industry in subsequent years, continuing to the present day.
In 2002 the insurance law was substantially updated in line with international standards and a separate law was created to deal with the regulation of insurance managers and insurance intermediaries. A further milestone was the introduction of a risk-based solvency framework for insurers in 2015 which was designed to provide a proportionate response to developing international capital and solvency standards.
CR: What do parents have to show today if they want to set up a Guernsey-licensed captive? How have these requirements changed over the years?
CB: Most captive applications are presented by one of our licensed insurance managers who will have worked with their client to conduct a feasibility study and gather all of the relevant information required for the commission to consider the application.
The feasibility study will largely form the basis of the business plan required by the commission, which should explain the rationale for the business to be underwritten and the structure of the insurance and/ or reinsurance programme.
The commission also requires information on the ownership structure of the captive and the composition of the board of directors. Proposed capitalisation and financial and solvency projections should also be submitted.
The information the commission requires has not fundamentally changed over the years but has evolved in line with developments in supervisory and financial crime legislation.
CR: What has made Guernsey a popular captive domicile over the past 100 years? And what makes it a popular domicile today?
CB: The commission has always tried to take a proportionate and pragmatic approach in the application of international standards to the regulation and supervision of captive insurers. In fact, the commission was instrumental in the development of the IAIS Application Paper on the Regulation and Supervision of Captive Insurers published in 2015. That, coupled with a stable political system and proximity to the London insurance market, has contributed to the success of the Guernsey insurance sector.
Guernsey is a mature jurisdiction with an established support infrastructure for captives and an active industry association which has combined professionalism and innovation over many years.
This all creates confidence in the jurisdiction and has enabled Guernsey to remain a popular captive domicile.
CR: What trends are you seeing in the types of captive now being formed? Are cells becoming more popular than pure captives?
CB: Cells are a popular option for smaller captives and we have seen many hundreds of cells formed over the past 25 years. Last year the commission introduced a pre-authorisation scheme for captive cells which enables the insurance manager, within certain parameters, to form a cell and begin underwriting in advance of submitting the details to the commission.
The commission still requires all of the relevant application information but the scheme enables the insurance manager to be responsive to their clients’ needs in situations where cover is required urgently.
This has been a popular development and most captive cells are now formed using this scheme. Pure captives still remain a popular option and the level of formations tends to follow the trends within the wider insurance market.
CR: What trends are you seeing in the lines of business now being put into new and existing captives?
CB: Recently we have seen a number of cells formed to underwrite professional indemnity cover for their parent companies when they have experienced difficulties in obtaining coverage in the market. Traditional property and casualty risks remain the dominant types of cover.
CR: Is the level of exposure Guernsey captives hold growing over time?
CB: Our statistics show the level of gross assets and premium written by Guernsey insurers has remained steady for a number of years. This demonstrates a mature market in which assets built up within captives provide the opportunity to respond to market conditions and to retain increased risk if required. This provides flexibility for a parent company to optimise the use of their captive.
CR: Are you requiring captives to hold extra capital to manage current high inflation?
CB: There are no specific capital requirements imposed on insurers to manage inflation risk, however, the solvency framework expects that insurers will regularly assess technical provisions to ensure reserves are adjusted as necessary to take account of inflation.
An increase in technical provisions will therefore lead to an increased capital requirement. Guernsey captives generally follow a conservative investment strategy and the commission’s guidance on resilience testing states that, where liabilities are subject to inflation, consideration should be given to the impact of changes in the real rate of return as well as a significant increase in the level of inflation from current levels.
CR: Can you clarify what are the ESG requirements you expect of new and existing captives forming in Guernsey?
CB: The commission has developed a green approach to demonstrate its commitment to develop climate finance through regulatory tools and to support the finance sector throughout the transition towards a low carbon economy.
The commission recognises the importance of the COP21 Accord in Paris, which stipulates that further finance flows into green investments are consistent with a pathway towards low greenhouse gas emissions and climate resilient development.
The commission considers both the global and local financial sectors are starting to transition towards a greener world and that it should cooperatively support that process itself. The commission is a member of the UN’s Sustainable Insurance Forum and the Network for Greening the Financial System.
These memberships allow the commission to engage with other regulators to develop awareness, understanding and capabilities on how to respond to climate-related risks. There are no specific ESG requirements for captives, although it is apparent that many parent companies are incorporating their captives into their group ESG frameworks.
The Guernsey International Insurance Association has developed an ESG framework for insurers. In 2021, the commission amended the Finance Sector Code of Corporate Governance to ask boards to consider the impact of climate change on their strategy and risk profile and, where they judge it appropriate, make climate change related disclosures.
In 2020, the commission issued amendments to the solvency rules for insurers which introduced a specific approach for green assets to help to incentivise increased investment in green assets by life insurers.
CR: Can oil and gas/carbon companies set up captives in Guernsey?
CB: Guernsey is home to captives for a number of energy sector firms, from oil and gas producers to domestic energy suppliers. If energy firms are experiencing difficulties in placing insurance programmes, a captive may play an increasingly important part of the risk management strategy.
Firms in transition from fossil fuels to renewables still require insurance cover and a captive can play a positive role in ensuring that cover is available during that process.
It is also important that firms can obtain cover for decommissioning risks to enable this process to continue. Therefore, the commission anticipates that captives will continue to be a truly essential risk management tool for all types of energy firms.