Guernsey sets its sights on reinsurance

30-11-2009

Nick Wild

Guernsey prepares to take on Bermuda, Dublin and Switzerland as the battle for reinsurers hots up.

Guernsey is a progressive and proactive international business centre. It has established credentials as an international finance centre of high repute with a very strong captive insurance sector. It also offers a number of advantages for reinsurers. These include a politically stable environment, a robust but flexible approach to regulation, a zero percent tax regime and a legal system based on English commercial law. In addition, the Island can offer the full complement of services required to undertake even the most complex of transactions.

On these points alone, Guernsey immediately appears to be an attractive place to do business. The government here is keen to see reinsurance business blossom on the Island. This is considered a natural progression for a domicile that already has a well-established captive sector.

Reinsurance companies can take advantage of the Island’s following attributes:

• A zero percent tax regime

• The Island’s approach to regulatory requirements for capital regarding Solvency Margin Requirements (SMR) and Own Capital Risk Assessments

• Legislation that enables a single entity to enter into insurance/ reinsurance contracts and capital market derivative contracts, such as insurance linked securities (ILS) and International Swaps and Derivatives Association (ISDA ) contracts from the same company • Securitisation of insurance portfolios, particularly life, and

• The opportunity to transact business with the Island’s existing captive insurance community. Captives are collectively substantial purchasers of reinsurance capacity.

Capital to support new reinsurance ventures is often deployed very quickly in order to seize an opportunity in the market— frequently to write specific risks for a relatively short duration. Special purpose vehicles, or sidecars, are a good example of the type of reinsurance entities that would benefit from swift approval and speedy set-up. This type of operation lends itself to the Guernsey business model, where regulatory approval can be obtained quickly and existing service providers can help establish a new operation in a short time frame.

Guernsey is experiencing an increasing level of interest from the investor community keen to access insurance risk. It offers diversification into an uncorrelated risk landscape, where the returns can be significant, although the risk of losses should also be considered.

It is against this background that the Island is seeking to garner interest from reinsurers and investors operating in this area, which will help to further diversify the Island’s insurance sector.

Getting the most from Guernsey

Non-US business is best suited to Guernsey, while Bermuda and Cayman are better placed to work with the US markets. The Island also suits businesses with generally low administrative workloads. Guernsey does not have large numbers of staff available to conduct low-level administration business, although much of this work can be outsourced from the Island where processing is a requirement of the business plan.

The business model best suited to Guernsey is one where speed to market is important, ease of access to and from London is essential, and where there are minimum staffing requirements, supported by existing local infrastructure. Such a business model should be able to maximise investor return in a favourable tax environment.

A number of players have already established operations on the Island, including Barbican Re, Catlin, Conopious, Generali and Hiscox. From these modest beginnings, it is hoped that the benefits of operating in Guernsey will attract other players.

In January 2009, Lloyd’s was granted a licence to write direct general insurance business in Guernsey, having previously been viewed as a ‘recognised insurer’, meaning underwriters were only permitted to write Guernsey insurance business on a cross-border basis. This is expected to further drive growth of the Guernsey reinsurance market. The new licence means underwriters can now write business locally through coverholders, while managing agents can establish service companies in Guernsey.

"Guernsey is experiencing an increasing level of interest from the investor community keen to access insurance risk."

Other UK groups may be attracted to establish reinsurance operations in Guernsey in light of the fact that, from July 1, 2009, UK companies with overseas subsidiaries whose business substantially comprises international third-party transactions—such as reinsurers—are exempt from paying UK tax on the dividend returned to the parent. This means that tax will only be levied in the jurisdiction in which the subsidiary operates, and therefore it is these rates that are important. Guernsey has a zero percent rate of tax on profits from insurance activities, compared to 12.5 percent in Dublin and 28 percent in the UK, for example.

Provided the right conditions are satisfied, the absence of taxation in the UK at parent level, combined with Guernsey’s zero percent rate of tax for insurance companies, means that a UK group with a Guernsey reinsurance vehicle can ensure that return on capital deployed is maximised. This provides additional flexibility and enables decisions to be made for purely business reasons. It is a benefit to UK groups with subsidiaries, no matter where they are located. However, the changes actually make Guernsey even more attractive in comparison with some of its competitor domiciles.

Reinsurers considering setting up a presence in Guernsey should also rest assured that Guernsey has the necessary infrastructure, including service providers. Well-known names from the accounting, legal and broking sectors, among others, are already in place to service the Island’s captive community. In light of the benefits that the Island has to offer reinsurance companies, interest in Guernsey as an alternative to locations such as Bermuda, Dublin and Switzerland is expected to grow.

Nick Wild is executive chairman (ex Americas) of JLT Insurance Management. He can be contacted at: Nick_Wild@jltgroup.com

Captive International