12 September 2019Analysis

Guernsey bullish on captive formations

Guernsey is geared up for growth in the captives space.

Guernsey registered nine new captives in 2017, according to Guernsey Finance - more than half the total for the whole of Europe. And while the number fell to five in 2018, it expects to exceed the level achieved in recent years in 2019.

Dominic Wheatley, CEO of Guernsey Finance, said: “The first stage of growth is from those that already run captives increasing their business. Then you get enquiries from potential new business, and finally some of that then translates into new captives forming. We are in phase two and are getting a lot of enquiries about captives.”

But Wheatley played down the idea that Europe could be the next big area of growth in the captives industry.

Wheatley said: “There is a big tax advantage to having a captive in the US. In the UK captive profits are consolidated into the parent company’s tax calculation so there is no tax benefit to having a captive at all.”

The same holds true across most of Europe. “French captives in Luxembourg can defer some tax but generally tax is not an issue in Europe,” said Wheatley.

The reasons for having a captive in Europe are more sophisticated - and more subtle, he said, relating to improvements in risk financing, measurement and management, all of which leads to better governance in the long term.

“It is a harder sell, the benefits are not immediate, they come over a period of four or five years,” said Wheatley.

But the hardening market and increasing concern around new risks such as cyber are increasing interest in captives, he added.

“It isn’t only businesses that are terrified of cyber, commercial underwriters are too,” said Wheatley. “Having a captive is one way of better understanding your cyber exposure. Being involved in the data gathering process means you can better understand your risk.”

While captives remain the bedrock of Guernsey’s insurance industry, the island has increasingly diversified into new areas, and is currently eyeing growth in the MGA space.

“Guernsey is a great place to innovate, we are like an innovation laboratory for London,” said Wheatley. “We innovate, as we did with our ILS regime, and when something is proven to work well then it gets taken up in London. That is happening in the MGA space.”

ILS has also seen exponential growth in Guernsey over a number of years. The island did its first ILS reinsurance transaction in 2006 and established its first collateralised reinsurance company in 2014.

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