GUERNSEY 2010CRA leaderin regulationMichael Poulding of the <strong>Guernsey</strong> Financial ServicesCommission believes both the insurance and reinsuranceindustry in <strong>Guernsey</strong> can benefit from Solvency II<strong>Guernsey</strong> is a British CrownDependency situated 50kilometres from the FrenchCoast in the bay of St Malo.It is fiscally independent from the UKand is responsible for setting its ownlegislation, including financial serviceslegislation. It is not a member of theEuropean Union (EU).The insurance market in <strong>Guernsey</strong>consists of over 700 individual insuranceentities including captive insurancecompanies, reinsurance companies,protected cell companies and their cells.Captive insurance companies and cellsaccount for approximately 60% of themarket. The total gross premium incomein 2008 was £3.3bn while total assets at31 December 2008 amounted to £21bn,an increase of 13% over the previousyear. Currently the areas of greatestgrowth are protected and incorporatedcell companies and this trend is expectedto continue.Captives licensed in <strong>Guernsey</strong> oftenutilise the services of commercial insurancecompanies, to front certain classesof risk, normally to comply with legislationin some jurisdictions that requirecertain classes of business such as employers’or motor liability to be insuredeither by locally licensed companies orby companies licensed in an EU memberstate. In these circumstances, the captiveacts as a reinsurer of the fronting companyand as a consequence, the frontingcompany has to consider the admissibilityof the reinsurance in its own solvencycalculations.Under the Solvency II regime, EU insuranceor reinsurance companies cedingreinsurance to a company situated in athird country outside the EU will not beable to take credit for the ceded reinsuranceunless the third country regulatoryand supervisory regime can be consideredequivalent to Solvency II. Criteriafor assessing equivalence are expected tobe established by Committee of EuropeanInsurance and Occupational PensionsSupervisors (CEIOPS) by July 2010.The <strong>Guernsey</strong> system of regulationThe current solvency capital requirementsfor <strong>Guernsey</strong> insurers, includingcaptives, are based on a percentage ofpremium income or total claims provisions.In practice companies are requiredto hold solvency capital equal to at least150% of the MCR (minimum capitalrequirement). The supervisor is able toimpose higher capital requirements ifjustified by the nature of the business.The approach adopted for simplecaptive insurance companies where accountcannot be taken of diversificationor pooling of risk is to consider the ‘riskgap’, in other words the difference betweenthe maximum total claim amountin any one year and the expected premiumincome. The risk gap should bemore than covered by available capital.In 2008, <strong>Guernsey</strong> introduced arequirement for all companies, includingcaptives, to produce an ‘OSCA’, in otherwords, an ‘Own Solvency Capital Assessment’.A guidance paper was issueddetailing the risk factors that should betaken into account. The introduction ofthe OSCA was intended to ensure thatthe boards of insurers considered theirown specific risk profile in determiningthe appropriate level of capital to beheld in excess of the statutory minimumrequirement. An analysis of the firstOSCA reports has shown that considerablethought has been given by insurancemanagers and boards to the specificrisks applicable to each company whichprovided valuable confirmation of theadequacy of the capital position.<strong>Guernsey</strong> is an active member of theInternational Association of InsuranceSupervisors (IAIS) and sits on most of theIAIS committees and subcommittees includingthe key Solvency Subcommittee.<strong>Guernsey</strong> represents the Offshore Regionof the IAIS and the Offshore Group6 Captive review www.captivereview.com
CRGUERNSEY 2010of Insurance Supervisors on the IAISExecutive Committee. The <strong>Guernsey</strong>system of regulation is based on the IAISInsurance Core Principles together withthe associated standards and guidance.This includes the IAIS guidance paperon captive insurers which was preparedby a group of both captive and non-captivesupervisors chaired by <strong>Guernsey</strong>.The insurance laws and regulations in<strong>Guernsey</strong> are regularly reviewed in linewith changes to the IAIS standards andin particular, changes will be made toensure that solvency requirements areconsistent with developing requirements.“As the largest captivedomicile in the Europeangeographical region, <strong>Guernsey</strong>is particularly well placed tofocus on the application ofSolvency II to captives”Solvency II equivalenceSince <strong>Guernsey</strong> is outside the EU, it isnot required to adopt EU Directives andis therefore not required to implementthe Solvency II regime. It will, however,take account of Solvency II when developingits own solvency and other regulatoryand supervisory requirements in linewith international standards, particularlyas the Solvency II regime is likely to beconsidered as a benchmark for evolvinginternational best practice.In order to achieve equivalence underthe Solvency II Directive, <strong>Guernsey</strong> will,under the expected equivalence criteria,have to be able to demonstrate that itsregime is compatible with the Solvency IIrequirements, although the full extent ofthe compatibility requirements will onlybe known when the equivalence criteriaare finalised.Under Solvency II, supervisors will beable to approve the use of internal modelsby insurers to establish their solvencycapital requirements as an alternativeto the standard methodology specifiedby the Qualitative Impact Studies. Theuse of internal models is expected to belimited to certain larger life insurancecompanies and reinsurers although itmay also be an option for the larger captiveinsurers. Regulatory guidance will bedeveloped to cover the appropriate useof internal models.An important component of the SolvencyII regime will be the application ofthe principle of proportionality. In viewof the nature of the <strong>Guernsey</strong> market,which has a number of small commercialinsurers and in particular captive insurers,many of which insure a single type ofrisk, the ability to apply proportionalityprinciples realistically in determining themethodology for determining solvencyrequirements is a particularly significantaspect of the regime.As the largest captive domicile in theEuropean geographical region, <strong>Guernsey</strong>is particularly well placed to focus on theapplication of Solvency II to captives. Weare in active discussion with both insurancesupervisors and insurance managementcompanies in the EU captivedomiciles of Dublin, Luxembourg andMalta to establish the impact of SolvencyII on the European captive insuranceindustry. We are also holding discussionswith bodies representing captive ownerssuch as the Association of Insurance andRisk Managers (AIRMIC) in the UK andthe European Captive Insurance and ReinsuranceOwners Association (ECIROA)in Europe.A number of insurance entities in both<strong>Guernsey</strong> and the EU are established asprotected cell companies or incorporatedcell companies. Consideration needs tobe given to the application of the SolvencyII requirements to protected cellcompanies and in particular to situationswhere cells each have recourse to corecapital for solvency purposes.Impact of Solvency II on <strong>Guernsey</strong><strong>Guernsey</strong> currently has a major captiveinsurance sector as well as an internationallife insurance sector. It is alsohome to an increasing number of bothlife and general reinsurance companies.The impact of Solvency II on the <strong>Guernsey</strong>market depends on the achievementof equivalence under the Solvency IIDirective.If equivalence is achieved, <strong>Guernsey</strong>captive insurance companies will still beable to utilise the services of EU frontingcompanies at an economic cost and thereinsurance sector is expected to expandas it will be able to accept ceded reinsurancefrom EU insurance and reinsurancecompanies. If the achievement of equivalenceis not achieved or is delayed, thereis a risk that the attraction of <strong>Guernsey</strong>as a captive insurance centre will diminishas the cost of fronting will increaseand EU captive owners will increasinglylook towards EU domiciles to establishtheir captives. The expansion of the reinsurancesector would also be adverselyimpacted by the reduced attractivenessto EU companies of ceding reinsuranceto <strong>Guernsey</strong> reinsurers.Companies in the international lifeinsurance sector would be less impactedif equivalence is not achieved as theyare less reliant on ceded reinsurance,although there could be an adverse impactwhere they participate in a poolingarrangement for mortality or morbidityrisks that includes EU life insurancecompanies.<strong>Guernsey</strong> is well placed to benefit fromthe introduction of the Solvency II regimein Europe, provided it can achieveequivalence status under the Directive.This will benefit both the captive insuranceand the reinsurance sectors.Achieving the equivalence status willinvolve further development of the<strong>Guernsey</strong> regulatory and supervisory regimein line with the latest internationalstandards while ensuring compatibilitywith the requirements of Solvency II. Animportant consideration will be the applicationthe requirements of the Directiveto smaller insurers and captives.Mike Poulding is currentlydeputy directorof the Internationalin the Insurance Divisionof the <strong>Guernsey</strong>Financial ServicesCommission. In thisrole, he is responsiblefor the support providedby the GFSCto the InternationalAssociation of InsuranceSupervisors and for ensuring that thedevelopment of the supervisory and regulatoryframework complies with evolvinginternational standards.www.captivereview.com Captive review 7
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