As John Darwood, senior advisor to the Guernsey Financial Services Commission points out, captive business has been carried on in the domicile since the early 1970s. Its Insurance Law became effective 31 December 1986. Today, Guernsey hosts 341 captives and 12 offshore life companies. 26 captives came on board last year.
"In the last three years Guernsey has added more captive registrations than any other European domicile," says Charles Allen, managing director of Prism Insurance Management, the captive management subsidiary of the Polygon Group of companies. (See box for further company details.)
Pure captives dominate, as is evident in Table 1, however following the recent introduction of protected cell companies (PCC) legislation, it is anticipated that associations and other similar affinity groups will show more interest. Such legislation extends the benefits of captive insurance to small companies and organisations. As the Commission puts it in the Guernsey Insurance Guide, "the introduction of PCC legislation has laid the foundations for Guernsey's rent-a-captive business and is of particular interest to the promoters of association captives, composite captives involving both life and general insurers, international groups involving numerous autonomous subsidiaries and even insurers who wish to separate the life funds of different policyholders into separate cells, or classes within a PCC."
Mr Allen remarks that the new legislation "is set to increase the attractiveness of Guernsey to a whole new market for insurance subsidiaries. While a large number of the major plcs have some form of captive insurance subsidiary, we envisage that the 'sub plc' company, of which there are some 19,000 in the UK alone, will find the cell concept of self-insurance an attractive and more feasible option than the formation of a wholly owned subsidiary company. It opens up the captive alternative risk financing tool to many who would previously have found it too expensive and who do not have the insurance costs of the larger organisations, yet still have above average risk management and lower than average loss records."
He goes on to point out that the statutory segregation of the assets of each cell from the liabilities of the others should give the necessary comfort to assureds that participation in such a vehicle will not expose them to the liabilities that might arise from other participant cells. "Apart from the risk transfer consideration this is one of the important differences to the rent-a-captive concept. This legislation has also been recognised by some of the major UK composites as a potential source of new business and Prism is set to incorporate not only its own PCC in a joint venture between Polygon and a major London investment trust, but has also entered into a services contract for a PCC of the Guardian Royal Exchange. Both the Guardian and Commercial Union (managed by J&H Marsh Mac) see the attractiveness of PCCs to a large number of their existing small to medium sized clients."
So how's the infrastructure?
With 34 insurance managers and abundant accounting, banking, investment and legal services, Guernsey's infrastructure is well developed and well able to accommodate both existing and new captive business. "Guernsey's business and communications infrastructure is first rate," contends Barry Todd, managing director of Newton Investment Management (Guernsey) Limited. "Standards are high and facilities are extensive. As for expansion, the finance sector already employs a high proportion of the total Guernsey workforce so the pressure to recruit and retain staff is keen. However, training has a very high priority and the finance sector is working with schools and colleges to ensure a more plentiful supply of quality local people."
The experienced infrastructure, contends Mr Darwood, is what sets the domicile apart from Jersey, its closest competitor geographically. "And, if we can beat our own drum, the same can be said of our regulatory office and team. We are probably not so far apart in those terms from Dublin and the Isle of Man."
Dublin and the Isle of Man are Guernsey's major competitors, of course. "Along with Guernsey these are important domiciles for UK parents," explains Conor Jennings, managing director of Commercial Union Management Services (Guernsey). He stresses, however, that since Dublin is part of the European Community it is particularly attractive to US and Scandinavian companies.
"Guernsey's PCC initiative is a big advantage," continues Mr Jennings, "but the domicile will have to build on this if it wants to attract more non-UK companies."
Referring to the Isle of Man in particular, Mr Todd remarks that, "there are many similarities in terms of regulations, infrastructure and facilities," but he points out that the choice of domicile is often settled on flight schedules and restaurants. "Guernsey has the edge on restaurants."
Mr Allen adds that: "In competitive terms, Guernsey is well placed in relation to other European domiciles, as is borne out by the formation numbers. The strength and respectability of the domicile both from a regulatory and infrastructure viewpoint are key factors, as is the support for the industry from the authorities including the ability to enact new legislation such as the PCC and redomiciliation rules to maintain its leading role and attractiveness."
With all of the above in mind, what does the future hold for Guernsey as a captive domicile? "We envisage continued steady development," says Mr Darwood. "The sources of our captive business are likely to diversify, with less emphasis on the UK. The nature of the business is also expected to change somewhat; PCCs will be more widely used, and other investment linked or securitised type products are likely to emerge."
Mr Todd agrees that the captive industry will continue to grow and continue to find business outside of the UK. "We are committed to Guernsey and looking forward to being part of an exciting future. Europe, North America and South Africa are areas becoming prominent in providing Guernsey with new business."
Mr Allen concludes that, in general terms, there are three important issues governing the further development of Guernsey's captive industry. "They are the Controlled Foreign Company legislation (CFC) which has recently been tightened by the UK tax authorities so that CFCs have to repatriate 90% of their profits rather than the previous 50% level. This will hinder the accumulation of funds and restrict the ability to broaden the underwriting scope of the captive without further capital injections. The level of IPT which is currently 4% but with the gradual harmonisation of European tax levels is expected to rise will act as a deterrent, leading to a reduction in insurance spend in both the traditional and alternative markets as the advantage over funding exposures via the balance sheet narrows.
"Finally, the continuing soft market conditions in all sectors make the advantages of formation more difficult to assess from the buyer's standpoint. However, if the insurance cycle runs true this situation will eventually turn in all markets and those with existing captives and relationships with reinsurers will stand to benefit to a greater extent than new participants into the captive market."
The message Mr Allen is relaying is that although the immediate past development of Guernsey as a captive domicile has been notably strong, the future may be restrained due to some of these factors. He adds, however, that: "Interest in alternative risk financing continues to be strong and Guernsey is well placed to keep moving forward with new products and the depth of expertise that has been accumulated."
The Prism story
Prism Insurance Management Ltd was formed last year. The company has an interesting tale to tell in terms of its history, as managing director, Charles Allen explains.
"In 1975 Swissair, SAS and KLM decided to form their own insurance company, Polygon Insurance, and appointed C.T. Bowring Guernsey to manage the company. Subsequently the management was transferred to Transglobe Underwriting Management Guernsey, a wholly owned captive management company of the English & American Group. The decision to form the captive was after an initial few years when the airlines had co-operated on joint technical support and pooled their insurance buying."
Polygon underwrote a share on the parents' aviation policies and a limited book of third party business until the early 1980s. "During the 1980s the third party business increased to encompass most areas of the aviation industry, and in 1988 the captive wrote 100% of the partners' business for the first time. The KSSAF group as it is known represents the largest single aviation placement in the world. In 1989, Austrian and Finnair became shareholders in Polygon and today the group encompasses nearly 44 airlines and has a combined fleet value of over $28 billion."
Alongside this development the 1980s saw Transglobe become one of the largest captive managers in Guernsey with a number of major UK plcs under management.
"In 1993 English & American went into liquidation and, as a result, Transglobe, its Guernsey subsidiary, was put up for sale by the liquidator. It was, at this point, that the airlines' shareholders, Polygon, decided the time was right to manage their own affairs and created their own management company with 45 of the original Transglobe staff joining them. The pure third party captive business of Transglobe was sold to J&H and Polygon had gained its independence. During the next few years Polygon had to consolidate its position and extract itself from its involvements, both as a shareholder and underwriter
in the English & American Group. Its reserves were strengthened, new capital was injected and the company has achieved a succession of highly profitable results.
"With the Polygon captive successfully moving forward, the management could look to expand the captive management side of the business and repeat its success as an independent manager with Transglobe. In 1997 Polygon Group Limited was formed as the holding company for the increasing variety of activities undertaken. These now include insurance underwriting with Polygon and its newly acquired subsidiary AICL in South Africa, captive insurance company management with Prism Insurance Management, which currently has over 15 clients under management, broking with Pentagon Brokers, which handles a wide variety of coverages, and trust and company management with Heritage, a well established operation of which the group has a majority shareholding."
Mr Allen concludes that: "With the increasing polarisation of the major broker owned management companies, Prism is set to become the largest independent management company in Guernsey. We have been approached by a number of potential clients, some considering setting up their own insurance subsidiary and some who have an existing operation but who for a number of reasons wish to consider the benefits of using an independent manager. The Polygon group structure offers some unique benefits to those considering using Prism to manage their insurance affairs. These include the ability to use the underwriting capacity of Polygon Insurance to assist in the placement of low level or 'non-traditional' covers, as well as our experience and expertise in the reinsurance markets. Through Polygon these are extensive and the current reinsurance spend of the insurance company in a variety of London and overseas markets amounts to in excess of $25 million. In addition, the broking and trust operations can further assist the captive client in achieving their strategic and organisational objectives."