Guernsey’s Insurance Advantage

Guernsey has had a thriving insurance industry for many years. One of the key strengths of the Guernsey insurance market is the experience and knowledge of the professionals in the industry, while the market is also remarkably diverse in terms of its participants. The island’s position as the largest captive insurance domicile in Europe is well publicised, but the island is home to a number of niche commercial insurers, specialising in a wide variety of insurance, life insurance and reinsurance products.

One only has to look at the Guernsey Financial Services Commission website to see how diverse the insurance market is.  There are a total of 752 ‘international’ insurers in the island, made up of traditional insurance companies, Protected Cell Companies, Incorporated Cell Companies and their respected cells (each of which is an insurer in its own right). These international insurers are mostly managed companies, and there are 19 different insurance managers in Guernsey. Compare this to Gibraltar where there are eight licensed insurance managers, and it is easy to see the wide variety of service providers offering diversification and competition for the international insurance market.  These insurance managers consist of the big four broker-managers (Aon, Marsh, Willis and JLT) as well as a number of independent insurance managers (Heritage, ARM, Kane, Hepburns, Robus, etc). The former are able to provide a ‘one stop shop’ to their large clients with both broking and captive services under one roof, whilst the latter offer an independent management service for those clients who value the services of their captive manager free from any conflict arising from other services which the company or group provides.

The diversity and competitiveness of the Guernsey international insurance market is one of the reasons why the GFSC has recorded a steady increase in gross premiums written, gross assets and net worth over the last 10 years, with the latter increasing from £6 billion to over £9 billion.  Also, the statistics reveal that the insurance market as a whole is remarkably resilient to the wider economic conditions in Europe. The island saw almost 100 new insurers licensed during 2012, and the overall solvency of the non-life international insurance market is more than 200 times higher than the aggregate minimum capital requirement.

The Guernsey Advantage

There are certain key features of the Guernsey insurance market, which ensures that it remains competitive as an insurance domicile.

•   The diversity, experience and knowledge of the participants (as mentioned above).

•   The fact that the island is not within the European Union.

•   The advantageous legislative framework which the island has adopted for insurance.

The Diversity, Experience and Knowledge of the Market

In addition to the large number and variety of participants in the market, Guernsey also has a track record in innovation when it comes to insurance.  The insurance regulator, the GFSC was one of the founding members of the International Association of Insurance Supervisors – which is the supranational body responsible for setting international insurance standards. The island was also the first to introduce Protected Cell Company legislation in 1997, which proved key to the opening up of the market to smaller participants and reducing the barriers to entry. The Guernsey PCC legislation has been copied by jurisdictions as diverse as Washington DC, Dubai and Malta, amongst others.

More recently the island has provided insurance solutions to both the social housing sector in the UK, and the UK homebuilding sector – both of which have faced difficulties for different reasons as a result of the recession. Also the island has seen a growth in ‘alternative risk transfer’ products such as Catastrophe Bonds and Industry Loss Warranties. One such bond has recently listed on the Channel Island Stock Exchange (thus proving that the insurance sector in Guernsey is well integrated with the other finance sectors in the island).

The expertise in the insurance industry extends to the accounting firms, the legal firms, the actuarial firms, the banks and investment managers and the many other service providers who are active in supporting the development of the market. This market development is due to receive a boost soon from the Guernsey International Insurance Association which has just formed a Market Development Committee to explore the opportunities for Guernsey in the ever-changing international insurance marketplace.

This depth and breadth of experience is hard to find in other captive insurance domiciles. Apart from Bermuda, which has spearheaded the development of international insurance and reinsurance, no other domicile has the same degree of talent available in one place.

The Non-EU Status of Guernsey

As I write this, the UK government is in a quandary about its EU membership with a number of senior Government figures suggesting that they would vote for an exit, and the UK Independence Party achieving its greatest ever success in the recent local elections.

Such Eurosceptism is well understood by Guernsey, which has never been an EU member. A smaller economy can react faster to economic change and take advantage of opportunities presented by the changing social and political landscape compared to a large economy (such as the EU) which is weighed down by the slow pace of change in a market plagued with political wrangling, recession and financial mis-management by its member states.

Guernsey’s insurance regulations, for instance, are fully compliant with international best practice, as defined by the International Association of Insurance Supervisors, but Guernsey is free to apply these high level codes in a way which best fits the insurers licensed in Guernsey so as to enable the insurers to remain competitive in comparison to their EU counterparts.

Guernsey was invited to become ‘equivalent’ to the EU’s yet-to-be-implemented new insurance regulatory regime called ‘Solvency II’, however the island’s decision-makers decided against this offer, on the grounds that the EU regulations may (or may not) be appropriate for EU licensed insurers, but did not seem to be appropriate for the niche specialist insurers in Guernsey. As Guernsey is outside of the EU it has the freedom to take this decision – a decision which Gibraltar and Malta do not have the freedom to take – thus giving the island a competitive advantage. 

Opting out of EU regulation may be seen by some as Guernsey taking the ‘easy option’ or applying a ‘lighter touch’ regulatory regime. The solvency levels within Guernsey insurers, as detailed above, should prove that the insurers located in Guernsey are less risky than their European counterparts, not more so, and the lower risk profile of these insurers is the very reason why applying a regulatory regime designed for higher-risk insurers would have been overly burdensome for the island’s insurers (‘a sledgehammer to crack a nut’). Rather, the GFSC have accepted the more challenging but ultimately more rewarding task of creating a bespoke regulatory regime, which continues to meet all the current international standards and effectively manages the regulatory risk of its insurance market but which will give the island’s insurers a competitive advantage compared to those insurers in the EU who find themselves weighed down by regulations designed for larger, more risky insurance entities.

The Advantageous Legislative Framework

Alongside the bespoke insurance regulatory laws sits a range of other legislation, such as the Companies (Guernsey) Law 2008 – a modern company law, which consolidates and updates the Protected Cell Company law, the Migration and Conversion laws, the Insolvency laws and a host of other corporate law to ensure that Guernsey companies can adapt quickly and efficiently to changing opportunities.  For example, at Heritage we have assisted a group with converting two captives into Protected Cell Companies and then amalgamating them, so as to bring all their insurance business into one legal entity with two cells. This was easily achieved using the provisions of the Company Law and a very user-friendly Company Registry, with its state of the art on-line reporting facilities.

In addition to the Company Law, the island’s Zero-ten Corporate Tax regime, which has been approved by the EU Code of Conduct Group, is both tax efficient and simple to understand for insurers. Coupled with a growing number of double tax agreements, the corporate tax position for Guernsey insurers is favourable. Furthermore, the new Controlled Foreign Company rules issued by the UK Treasury are also beneficial for UK-based international companies with Guernsey captives, as the UK tax liability for such companies is limited to the profits arising on UK insurance risks, rather than the overall profits of the company, with an exemption below £500k of profits.

Finally, Guernsey has adopted all of the Financial Action Task Force recommendations in relation to anti-money laundering (AML), and it is therefore regarded as an ‘equivalent’ jurisdiction in relation to AML with the EU and other developed world economies, such as the USA, Canada, Australia and others. Most recently the regulator in Guernsey has softened the requirements for general insurance to recognise the low-risk nature of this type of insurance in relation to money laundering and financial crime. This means that Guernsey insurers can compete on an equal footing with other European domiciles in relation to AML compliance.

Guernsey’s enviable position as an insurance domicile has been hard earned, and the result of the industry (as represented by the Guernsey International Insurance Association), the politicians (in particular the Commerce and Employment Department) and the regulator (the Guernsey Financial Services Commission) all working together to identify and facilitate the creation of new products and services. This isn’t just down to innovation; it requires legislative and political intervention at the highest levels to ensure that the market continues to provide the most attractive location for niche, specialist insurance start-ups in Europe, and possibly the world.