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GUERNSEY 2010CRGuernsey’sfuture is brightDavid Sheil of Alternative Risk Management tells Captive Review howGuernsey is prepared for the aftermath of the global economic crisisand the changes that Solvency II will bring to the industryAs Guernsey continues to establishits position as a leading insuranceand captive centre, the residualeffects of the economic crisisalongside the potential impact of SolvencyII means that captive managers in thejurisdiction must be prepared to adapt tofuture changes as the insurance industrycontinues to evolve.Drawing upon a wealth of experience,David Sheil, operations director at AlternativeRisk Management (ARM), speaks toCaptive Review about the current state ofthe Guernsey captive market and describesthe opportunities and challenges that thejurisdiction will face going forward.Captive Review (CR): What recent trendshave you seen in new captive and cellformations?David Sheil (DS): Despite a self-evidentlypoor economic backdrop, the number ofcells being formed continues an upwardtrend. Equally, we are not seeing clientsclose down their existing captives orliquidate their cells, and organic growthwithin existing clients’ structures continuesto thrive.The types of risk being placed intocaptives include professional indemnity,legal expenses, trade credit, marine cargo,international medical plans, new emergingtechnologies and unsurprisingly, bankingand finance risks. We are also seeing anincreasing interest in captives and cellscoming out of Europe recently.CR: There has been some consolidationrecently in the captive manager marketin Guernsey and Bermuda. Do you see acontinuation of this?DS: Captive managers buy and merge withother managers for a number of reasons.One of those reasons is to achieve scale ina particular domicile or perhaps a numberof domiciles. There are also small nichecaptive managers who have found a ceilingto the level at which they can expandand are also finding the regulatory andtechnical burden significant enough tomake it uneconomic to continue on theirown. In the case of Guernsey, where oncethere were almost 15 managers 10-12 yearsago, following mergers and acquisitionsby the large brokers in the main, we nowhave about six that dominate the market,four broker-owned and two independents.Large broker-owned managers havestrong tie-ins, of course, to their brokingcounterparts, particularly in Londonwhere multinational captive programmesfeature largely, whereas independentslike ourselves also have clients of this typeand a variety of owner-managed small- tomedium-sized clients originating out ofindependent UK and European brokers.CR: How do you think Guernsey is performingas a captive domicile?DS: It remains a significant player across allaspects of the captive market. Guernsey hasalways had and continues to have stronglinks with London brokers, insurers andreinsurers – being physically and culturallyso close to one of the world’s leading insurancemarkets is key to our success. Also, asGuernsey and Jersey are major financialcentres themselves, we continue to enjoyreferrals from other financial and legalintermediaries across the Channel Islandsas well. Guernsey Finance, for example, isworking very hard on its own to promotethis island as a home for captives and as areinsurance centre. A lot of our success isalso a tribute to the confidence our clientshave in the skill sets of people who work inthe industry here. There will, however, alwaysbe politico-legal issues to address notonly in our industry but across all aspectsof offshore financial services, such as taxhaven accusations when some comparativeonshore jurisdictions have themselves moreaggressive tax regimes, and the rising costof compliance and regulation.CR: What effect are increasing rates of insuranceand reinsurance having on clients’costs and on their captives?DS: It is not clear that rates are risingacross all lines of insurance at the samelevel. Certain insurers have been hit hardby the financial crisis and are trying torepair their balance sheets, but customershave also been hit equally hard andare likely to have reduced capacity to paypremiums. Reinsurers, who will often be amajor driver in rates, have experienced arelatively stable 2009 so far. However, theytoo have been hit by Hurricane Ike lossesand the potential for further hurricane andstorm losses in 2009. The insurance marketin general is looking at the regulatorycompliancecost of Solvency II and theprobability of rising interest rates in 2010.There has been a large influx of capacityinto reinsurance casualty markets and it isexpected that will maintain stable rates into2010, although in professional indemnity(PI) and professional lines there have beensome significant increases in rates andprobably more to come for financial institutions’directors’ and officers’ (D&O) covers.We may even experience more clients in16 Captive review www.captivereview.com
CRGUERNSEY 2010that field looking for captive solutions forboth their own balance sheets and alsowhere they take on a combination of risksin certain transactions with customers.We are also seeing increased interest intrade-credit solutions using captives. Thetrade credit market has been hit by largelosses with some underwriters withdrawingfrom the market altogether. The reinsurancemarket in this line is beginning tostabilise, although certainty of that willdepend on the loss development of claimsarising from the past 12 months or so andthe fact that there is reducing demandanyway due to prevailing economic circumstances.CR: How important are taxation considerationsfor new and existing captive owners?DS: It is rarely, if ever, a key driver. Clientsare more focused on dealing with the riskthey retain or developing a suitable captiveretention structure or on an underwritingopportunity that complements theircustomer base, for example, in areas suchas travel insurance or extended warranty.Controlled Foreign Companies (CFC) legislationand taxation on profits has alwaysbeen there in the background, of course,and it is just something that has to becomplied with. The focus is more on managingthe risk rather than over-doing thetax aspect although there is some recentlegislation in CFC regarding loss-reservecalculations that both clients and managersneed to become familiar with.On the Insurance Premium Tax (IPT)front, the Kvaerner case means there ismore of a focus on premium allocationsand a more in depth consideration of theway losses are paid and accounted for inoverseas subsidiaries.CR: What effect will Solvency II have oncaptives?DS: Solvency II is at an advanced stagethroughout European insurers under thethree pillars that set out capital requirementsand risk management standards.The Financial Services Authority (FSA) willbe publishing its Stage 1 Thematic reviewshortly with Stage 2 beginning in October2009 and ending in late 2010. This will bethe final discussion phase before actual dryruns of the implementation phase beforegoing live in 2012. It is possible that someinsurers may look for enhanced securityor collateral where they front for captivesif they are expected to meet certainregulatory capital requirements. In certainjurisdictions, the industry has sought a‘carve out’ for captives. A question arisesas to whether Guernsey with its system ofOwn Solvency Capital Assessment (OSCA)meets any kind of equivalence status whichis very much the same situation underthe Reinsurance Directive. Where there isconsidered to be equivalence in prudentialregulation, the various directives allow theEC to initiate agreements with non-EU territoriesand provide for mutual recognitionof supervisory roles and practices.CR: What future does Guernsey have incaptives?DS: A very bright and positive one. I thinkinsurance brokers and insurance carriers“As longas our localregulation,robust as it is,remains gearedtowards thekind of businessthat Guernseyattracts, thenwe havesomething tolook forward to”David Sheil has over22 years’ experiencein the financialservices industry, 16of which were spentworking in Guernseycaptives. He hasworked for Arthur Andersen,Aon and mostrecently AIG. Davidjoined ARM, an independent manager inGuernsey in 2008.respect the industry’s professionalism andcapabilities to develop solutions to bothrecurring and sometimes novel problems.As long as our local regulation, robust asit is, remains geared towards the kind ofbusiness that Guernsey attracts, then wehave something to look forward to. It isalso worth saying that Guernsey Financehas been working hard on promotingthe island as a reinsurance centre and wealready have some strong players set updown here.Hopefully, it is the beginning of a trendgiven the island’s proximity to London andEuropean time zones, as we undoubtedlyhave the skill set here (as an industry, weinteract with virtually every major insurerand reinsurer probably every day of theweek) and the legislation to handle reinsuranceoperations.www.captivereview.com Captive review 17
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