A good outlook for future relationships

Against a backdrop of soft insurance markets slowing the growth of traditional captive insurance business in Europe, and growing concerns around Brexit and the future of the London Market, Guernsey finds itself well prepared to face these challenges.

These were some of the main talking points at this year’s Guernsey Insurance Forum, held on October 11 at the Banking Hall at Cornhill in London.

Speaking at Guernsey Finance’s major London insurance market event, chief executive Dominic Wheatley feels bullish about the future of the island and the captives sector.

“We are right to feel optimistic about the future of our industry,” said Wheatley.

“Figures presented at the Forum demonstrate that captive insurance is not in decline. Yes, it is facing challenges, but Guernsey will respond to those challenges, and will continue to deliver excellent solutions to our clients.”

Guernsey, Europe’s largest captive insurance domicile, claims more than half of all new growth in the European captives market in 2017. It had a fruitful 2017 with nine new captive licences.

“We are the number one captive insurance domicile in Europe for a reason. We have been doing this for a long time. We have dealt with many of the issues facing the world today, and we are better prepared than many others to handle the new issues that emerge,” Wheatley claimed.

Along with Brexit and the future of the London Market, one panel discussed economic substance, and how the EU-driven debate over substance in business activities could actually strengthen the captive insurance market.

The base erosion and profit shifting (BEPS) debate has caused jurisdictions to take different approaches to how they view business substance.

Guernsey lawyer Kate Storey, partner at Walkers, said: “New substance requirements are not a big deal for Guernsey—we have always been a jurisdiction of substance in insurance.

“We have 50 years of history in insurance management. Pretty much every international insurer uses an insurance manager in Guernsey, and we employ chartered insurers and the skills all there within the management in Guernsey.”

Brexit

Business continuity has been a key concern among insurers following the UK’s decision to leave the EU, and has led some to question how Guernsey’s future relationship with parties will look.

“A key issue from our point of view is that there will no longer be any EU border between ourselves and London, our largest market for financial services,” said Wheatley.

However, Wheatley suggested, Guernsey’s relationship with London is “good and strong”, and will even be enhanced after Brexit.

The Guernsey Financial Services Commission signed a Memorandum of Understanding with the Bank of England, which was a reaffirmation of the relationship between the Guernsey regulator and the Prudential Regulation Authority (PRA).

PRA is a part of the Bank of England and responsible for the prudential regulation and supervision of banks, insurers and major investment firms, regulating some 1,700 financial firms.

Through this agreement, the parties will be able to share confidential information about regulated entities and formally cooperate on other supervision activities.

The development was welcomed by Wheatley, who believes this relationship is important for financial services and insurance in the Channel Islands, particularly as both parties seek to reposition the trading relationship post-Brexit.

A panel discussion at the event involving Theo Leonard from Barclays and Suzy Awford, head of regulatory and government affairs at AIG Europe, suggests the UK could learn from Guernsey’s unique position as a major captive insurance centre within Europe but outside the EU.

Will Thomas-Ferrand, international practice leader at Marsh Captive Solutions, was also at the panel.

He argued that the UK’s departure from the EU is not influencing redomiciliation among European captives, and while there are vast uncertainties around Brexit, it is not high on the risk management agenda for them.

Rather than the focus being on Brexit causing problems in small, isolated instances where a captive is trying to write from the EU to the UK or vice versa and not being able to achieve that, Thomas-Ferrand said it raises a bigger questions of whether the captive is financing the risks that its parent corporations is exposed to in the right way.

“Brexit itself is a conversation that is affecting captives but actually captives give you more flexibility to design your risk management solution according to the times we all face,” he said.

“It doesn’t matter what political industrial or economic changes we are facing, the captive effectively gives us more flexibility.”

In his position as a captive manager, Thomas-Ferrand works with both EU and non-EU domiciles, and he has seen only one captive redomicile which had been partly influenced by Brexit.

“I don’t think it is something that many risk managers have considered, and it would be a big issue. Jurisdiction choice is not done on a whim,” he said.

Enhancing the London Market

Against all the changes the London insurance market is going through—aside from Brexit—one panel suggested that Guernsey can help it to develop and bring forth new opportunities.

Karl Hennessy, CEO of Carrier Solutions at Aon, said the London insurance market has survived multiple challenges over the past 300 years and would not be derailed by issues such as Brexit.

“We have been here before. We have faced major dislocation in our marketplace and the ability and opportunity to trade have come through it. Brexit is an unwelcome distraction but it’s not the only challenge we face. And there are real opportunities still out there,” he said.

Hennessy described London as “a unique insurance ecosystem” and the insurance sector equivalent of Silicon Valley.

“We have a high concentration of insurance-related intellectual capital where ideas, opportunities, challenges and innovations can be quickly resourced and actioned. The London Market develops solutions which match customers’ needs in a way that no other market has been able to do,” he said.

Hennessy suggested there is huge opportunity for innovation in fields such as risk identification, litigation, management, retention, transfer, and cyber.

“A proportion of these risks are retained on balance sheets, and this is a huge opportunity for the specialist risk market to innovate meaningful solutions to help entities to manage the transfer of that risk,” he said.

Hennessy called on the London industry to “galvanise itself” to help clients navigate these risks, potentially through partnering, including with jurisdictions such as Guernsey.

“London is ideally placed to capitalise. Modernisation is key—not simply doing what we currently do better, but challenging why do it that way, or why do it at all? Every aspect of what we do and how we do it must be challenged.

“This is not business as usual. We can’t leave our fate to chance,” he added.

“We must focus on innovation—improve how we do things, where and why we do them. And continue to invest in the talent that underpins the marketplace and continue to accentuate and differentiate the London Market from others.”