GUERNSEY

100 YEARS OF SPECIALIST INSURANCE SERVICES

In 2022, Guernsey celebrates 100 years of captive insurance. Chair of the Guernsey International Insurance Association and CEO of Humboldt Re Mark Elliott explores a brief history of the island’s captives sector and the significance of this milestone.

“Guernsey’s insurance sector will be a beacon of thought leadership and a safe harbor.” MARK ELLIOTT, GIIA

The Commercial Insurance Corporation Limited (CICL) was listed with the Guernsey Registry in 1922. Owned by the Vestey Group, it covered a range of lines for its various business activities including general & life insurance, money lending, property, theft, investment and marine.

It was known then as an insurance subsidiary—the term “captive” was coined by Frederic Reiss upon founding the Steel Insurance Company of America, borrowing the term from “captive” mines sending ore to the parent company’s mills.

Although the growth of captives in Guernsey really took off in the 1970s, this centenary is worthy of celebration because it is a landmark for specialist financial services in Guernsey, and an early example of Guernsey as a pioneering and innovative finance center.

It provides an opportunity to reflect on the history, development and successes of Guernsey’s international insurance industry from its early beginnings, through its expansion during the 1970s and 1980s, with Guernsey becoming the first offshore jurisdiction to enact insurance legislation, to consolidation of its position as a major player in the captives space through the 1990s and into the 2000s, when Guernsey demonstrated its expertise and thought leadership with the introduction of Protected Cell Company (PCC) legislation.

Innovation

Captives are one of the most innovative solutions available to corporate risk managers and allow them to develop new classes of business in a sandbox, create additional capacity and/or drive profitable underwriting. The fact this process started over 100 years ago shows how the best innovations add value for generations.

Guernsey has remained innovative, introducing the world to the PCC concept, undertaking the world’s first insurance-linked securities (ILS) deal on the blockchain and introducing a pre-authorization scheme for insurance cells, to name a few. It is important that we continue innovating to ensure captives remain relevant for the next 100 years.

Growth

Significant growth in the 1970s came as companies bought into the captive insurance concept. Uncertainty and volatility in international relations and global economies translated into the commercial insurance market. In response, corporations sought to retain more of their insurable risk and captive formations increased, with many UK-headquartered multinationals establishing captives in Guernsey.

The 1980s provided the real springboard for growth with the introduction of insurance legislation proportionate to the captive industry in Guernsey in 1983—invaluable for captive users, who achieved greater certainty. The influx of insurance professionals in the 1980s and 1990s, recognizing the potential of our industry, was also a strategically important period.

Evolving

The global economy has dealt with seismic changes in the 21st century. New and evolving risks have to be insured, and the captive insurance industry has been equal to the challenge.

Technological advances mean captive managers now have quicker access to more detailed data. Captive owners/insureds expect faster settlement of claims and a real-time understanding of performance. These advances have also increased the operational risk to captives from cybercrime. Regulators are increasingly expecting and requiring that captive board members are familiar with these risks and their captive’s exposure.

Our industry has always been subject to a developing regulatory environment. Guernsey is no exception. The island’s regulator, the Guernsey Financial Services Commission (GFSC), is actively involved with the International Association of Insurance Supervisors, and seeks to ensure that Guernsey’s regulatory framework follows that organization’s Insurance Core Principles, placing it at the forefront of international regulatory standards.

Over the years, the industry has proactively engaged with the GFSC on these developments and has adapted to changes in solvency and capital requirements, and the implementation and development of a code of corporate governance, as well as changes in data protection law and the implementation of economic substance regulations.

A thriving industry

Captives have benefited from the higher premium rates affecting most areas of commercial insurance and reinsurance. Creating a captive increases the capacity available to the owner and creates competitive tensions with the remaining markets, as premium ceded to a captive very rarely returns to the open market.

In this hard market, risk retention becomes more attractive to commercial insurance buyers, and the economic arguments for forming a captive are significantly increased. This has led buyers to ask whether they might benefit from insuring their own risks using captive vehicles. At the same time, existing captive owners have significantly increased the use of their vehicles, bringing in new lines of cover and increasing participation in others.

COVID-19 has had significant global impact, and there is also increasing global focus on climate change risk. In uncertain times when businesses face rapidly-developing risk exposures, captives are increasingly used to address risks for which organizations find it difficult to obtain cover from more traditional insurance markets.

“Existing captive owners have significantly increased the use of their vehicles.”

Sustainability

Guernsey has always been a responsible global citizen and is supporting the changes necessary to improve global standards for the environment, socially and through high standards of corporate governance (ESG).

In the early 2000s, Guernsey was one of the first jurisdictions in the world to introduce a code of corporate governance specifically tailored to its insurance industry and is currently contributing to the island’s sustainable finance sector. In 2021 the Guernsey International Insurance Association (GIIA) created the world’s first ESG framework with a kitemark for its members. It enables insurers and insurance managers who are members of GIIA to self-certify, with the kitemark created through a third-party accreditation process. It followed the United Nations’ recommended approach of incorporating ESG processes to align with insurer’s products, services and investments with the UN Sustainable Development Goals (SDGs).

The framework sets out four pillars of requirements which must be fulfilled:

  • Embed ESG within the decision-making and governance structure.
  • Risks underwritten to contribute to achieving the sustainable development goals.
  • Investments held to contribute to achieving sustainable development goals.
  • Insurer to publicly disclose how it has met the framework’s requirements.

Dunant Re IC—an incorporated cell of Replexus ICC (Guernsey)—was the first entity to receive accreditation, and sources suggest business is being attracted to Guernsey by the framework and kitemark.

ESG is increasingly foremost on the agendas of many organizations. Many of the SDGs respond to natural and manmade risks, while others have the potential to create internal risk for large employers and businesses with a large numbers of customers.

In 2021, the GFSC introduced Principle 18 to the Licensed Insurers’ Code of Corporate Governance, placing a regulatory requirement for the board of an insurer to specifically consider the impact of climate change on its business strategy and risk profile.

With captive insurance an integral part of a corporation’s risk management strategy, it is essential that the captive is involved its owner’s considerations of these matters, and equally important that they are considered by the captive board. GIIA’s framework helps member organizations manage ESG opportunities and risks, and deliver positive ESG impact.

The future

The history of captives is one of adapting to continual change. While the current hard market has led to more new formations, rates in the commercial market will likely stabilize and increased competition will lead to a softening of the market.

We nevertheless expect to see more opportunities for captives to underwrite the emerging and unique risks of their parents for which there is no or insufficient market capacity.

Insurance as a financial instrument is unique and flexible, providing certainty where there previously was none, and one might argue that it has never been more relevant. Enabling companies to transfer risk by way of an insurance contract should always retain a compelling logic. Captives will continue to adapt to support corporates seeking a foundation of certainty from which to speculate in their core areas.

Why Guernsey?

Guernsey is Europe’s leading captive domicile. Guernsey led European captive formations with six out of 16 across the continent in 2020. There are nearly 800 captives in Europe, with Guernsey’s market share at 36.5 percent, with 287 captives.

The island has applied its captive insurance expertise to niche markets such as longevity risk transfer. People come to Guernsey for captive insurance because of its reputation, track record, reliability, innovation, depth of knowledge and talent, appropriate regulatory regime, and wealth of supporting services.

Guernsey’s more “hands-on” approach to insurance underwriting for captives is key to how they demonstrate substance on-island. This was custom and practice long before substance rules were introduced.

Since January 2016, captives domiciled within the EU have had to comply with Solvency II, its harmonized insurance regulatory regime. Guernsey is not in the EU, so is not required to implement Solvency II. Instead, Guernsey’s regime distinguishes between commercial re/insurance and captive insurance. As a result, captives in Guernsey are subject to a capital floor of £100,000 ($135,000) and confidence levels of 90 percent. This proportionate approach is attractive to current and potential captive owners, especially those who still want a domicile within the European region.

Looking back over 100 years of evolution and innovation, there is confidence that Guernsey’s insurance sector will be a beacon of thought leadership and a safe harbor with strong and proportional regulation. Guernsey’s captive insurance industry has historically proved itself capable of providing solutions to new and changing risks, and will continue to rise to these challenges.

To find out more visit Guernsey International Insurance Association at: giia.gg/

Mark Elliott is chair of the Guernsey International Insurance Association and chief executive officer of Humboldt Re. He can be contacted at: mark.elliott@humboldtre.com

Share this page

Image Credit: Shutterstock / POPOVARTEM.COM

CICA: 50 years of progress