The end of the market cycle

Recently at an industry conference a captive professional remarked in hushed tones, “If I hear one more person say ‘hard market’ today…”

You can speculate as to what the end of that sentence was going to be, after two days of presentations, workshops and meetings where the focus had seemed to solely be on the hardening market and what it means.

And many others in the room may have felt the same, after this slight obsession with the changing market had everyone chasing after the captive professionals, asking them how a captive can help. The phrase was becoming somewhat of a dirty word, one you may become sick of hearing, even if it meant that everyone wanted to be your best friend for the day.

But it’s something that can’t be escaped. The think pieces, the panels, the conversations over drinks, are all going to continue as premiums continue to rise and the industry works out what to do with the changing conditions.

Market adjustment

Dominic Wheatley, the current CEO of Guernsey Finance, has a different, somewhat controversial view on the hard market: he doesn’t believe the industry is going into one.

Wheatley has been in the industry for a long time, working across underwriting and broking in the London market before getting into the captive insurance space. So if you’re looking for someone who has experience with market cycles and analysing the state of the industry, he’s your guy.

While the majority of the industry is looking at the rising prices and talking about hardening, Wheatley instead is looking at the bigger picture and says that actually, this isn’t a market change. He instead believes that what is happening is a market adjustment, meaning that any price rises are a permanent change that won’t swing back in time.

“I don’t think we have to sort of market cycles that we had 20 years ago. We’ve had 17 years of a soft market, with just a little blip in 2008, but it didn’t really affect things very much. And the drivers of this hardening market are not cyclical drivers, really, some of them have the potential to readjust,” he explained.

Some of these drivers, according to the CEO, include the low interest rates that are sticking around, which he believes have a big impact on the larger economic environment in general.

“One of these factors is obviously the ultra-low interest rate environment that people have now,” Wheatley said. “And that means that people are looking forward to alternative asset classes to allocate capital into. So that’s actually been quite a driver of the soft market and so on.”

Hard and soft cycles

This means, the CEO says, that it won’t be a true hard market because the causes of the soft market that the industry has experienced are still present. So he believes that there are different causes for the rising prices, and in time insurers, both captives and mainstream insurers, will see that this is not a cycle.

“Some of those soft market drivers are still there. But what the insurers, the underwriters, what they have found is that there’s a quid pro quo on there and all of that capital needs to be deployed and they need to create a return to their investors. I think that this is more of an adjustment to the market than part of the market cycle.”

Not everyone feels the same way, as evidenced by the constant talk of the move into a hard market, and the preparations many are making for a cycle. But Wheatley isn’t saying that cycles have disappeared altogether, just that what is being experienced currently isn’t a hard market like we have seen before.

“I don’t think that it’s a hard, soft cycle. I think this is an adjustment and the adjustment will restabilise at some point. Which is not to say that I think market trends have disappeared, but I think the economic circumstances that we’re currently living in are, from a historic point of view, quite unusual,” Wheatley explained.

“Therefore there’s a kind of suspension, in my view, of normal business cycles, and I think insurance is not immune from that. For me, this is a market adjustment and it will have some legs, and where it will plateau I genuinely don’t know.”

Past indicators

Calling the historic circumstances “unusual” are a result of Wheatley being in the market a long time. The reason he has come to this conclusion is that he simply doesn’t see this as being anything like the hard markets he has seen previously. While for others who have been in the captive industry a decade this might feel hard, for him it isn’t.

“If you look at the rates now and I’m old enough to have lived through a couple of hard market cycles, the rates we’re talking about now, nothing like the levels of historic hard markets, yet,” he said.

So, will there ever be a hard market? Of course. But as for when, it’s difficult to say. According to Wheatley, there is one solid way he has to tell when the market is hard.

“I can remember when in the 90s where routinely the group finance director would be on the board of the captive because it was significant,” he said. “I don’t think you’ll find many companies of that size that you’ll find many finance directors sitting on the boards of captives.

“Because it’s just not a big enough number for them to be personally interested in. When you get to the stage where they start wanting to go on the captive board again, that might be the sign that we’ve reached a hard market.”

Captive formations

However, whether this is a hard market or a market adjustment, the facts seem to be that the situation is causing positive changes for the captive industry. Domiciles are reporting increases in captive formations, and captive managers are busy with inquiries across the board.

Wheatley is quick to point out that his information is anecdotal, that there won’t be any hard numbers on captive formation figures for the year just yet. But he is plugged into the industry in Guernsey, speaking to captive owners, managers, brokers, consultants.

“Every single manager that I’ve spoken to, and I’ve spoken to most of them, say there is a marked increase in inquiries,” he said. “And also for new business people who don’t have captives who are looking into having captives they are commissioning feasibility studies.”

This has been the story across the world when speaking to state insurance commissioners and government representatives. After a few years of plateauing numbers, suddenly interest is up, and formations are starting to pick up again.

Moves to Guernsey

As well as new formations, Wheatley said that there had been some interest from captives in other European domiciles who were looking to potentially move to Guernsey.

“There’s also some signs of inquiries about moving captives to Guernsey from elsewhere. In particular, EU captives who are finding life in the Solvency II area quite difficult,” he explained.

Guernsey is outside the scope of the Solvency II regime, and unlike some other domiciles that chose to voluntarily take up the rules fully or partly even though they were not required to, the state has opted not to.

This, the CEO explained, has put Guernsey in a unique position, given it is outside Solvency II but been given tax compliant accreditation by the EU.

“As people look to use their captive more those types of issues are starting to come up, particularly for captives based in the EU. And there have been one or two who have been encouraged by Guernsey’s accreditation as tax compliant by the EU, which was announced on the 12th of March this year,” Wheatley said.

“And that has encouraged some companies to look at domiciling of their captive away from non-white listed jurisdictions and towards Guernsey as the largest of the white-listed jurisdictions.”

Wheatley believes this, combined with Guernsey’s status as the European captive hub, is why the domicile is picking up other captives who are choosing to move.

“We are the regional number one by quite a long way,” he said. “I mean there really isn’t another significant captive centre in Europe. By Europe, I mean the region rather than the EU. If you ignore domestic US captives, then there really is only ourselves and Bermuda who have got substantial international captives business. It really is a genuinely global industry here.”

As for what will happen going forward, Wheatley leaves with this optimistic thought, that even if we don’t move into a hard market, he thinks the future is bright for captives.

“It’s likely that these rate increases will stick for at least the foreseeable future,” he said. “Bear in mind that the captives have remained and have remained worthy, worthwhile even during the soft market.”

12 August 2024
5-6 November 2025

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