Guernsey is Europe's largest captive domicile and the third largest in the world (see Table 1).
Two-thirds of Guernsey's captives are UK-owned, while the remainder have parents situated throughout the world (see Table 4). Sponsor origins outside Europe include: Australia, Bermuda, BVI, Canada, Cayman, Hong Kong, Israel, Japan, Malta, New Zealand, South Africa and United States. In addition, some sponsors are multinational, being international joint ventures.
In 1999, Guernsey's offshore insurance sector saw another active year. New registrations (18) during 1999 offset the 17 captives that surrendered their licences. With the reactivation of another captive during the year, this produced a net increase of two captives over 1999. One of the new registrations migrated into Guernsey from another jurisdiction, taking advantage of the Migration of Companies Ordinance 1997.
Protected cell companies (PCCs), which Guernsey pioneered over three years ago, remain the main growth area within the island's offshore insurance sector, as well as continuing to create major interest worldwide. Seven PCCs were established during 1999, bringing the total in Guernsey to 20. Several other jurisdictions have introduced similar legislation or are considering doing so. In the United States, the National Association (NAIC) of Insurance Commissioners approved a model law based on the protected cell company legislation in December. In Europe, domiciles are divided on the subject of introducing PCCs.
The increasing numbers of PCCs demonstrate continuing demand for these vehicles, despite fewer worldwide captive formations and the soft insurance market that have prevailed over recent years. For Guernsey, the main growth area in 1999 was in the number of cells formed within PCCS. This saw an increase of 59 cells, producing a total of 96.
Recent PCC additions include:
According to the Guernsey Financial Services Commission (GFSC), among the 59 new cells established, several were registered by major corporate names and many represented a first entry into the insurance market by their owners.
The pace of PCCs appears to be continuing this year. For example, on 3 May 2000, ACE Bermuda Insurance Ltd and Willis announced the launch of a strategic partnership based on the establishment of an ACE-owned PCC in Guernsey. Called ACE PCC Insurance Ltd, the company will write a wide range of alternative risk financing products, creating substantial additional capacity for non-traditional exposures.
Non-PCC registrations in 1999 included BLG Insurance Ltd, established by Legal & General plc on behalf of a US subsidiary to manage long term risks, and White Swan Insurance Co Ltd, registered by the GT Foundation to cover warranty claims. Swiss Re and the Partners Group also established a self-managed captive, Princess Management and Insurance Ltd, which provides cover in respect of bonds issued by Princess Private Equity Holdings Ltd. Other new registrations included Carfax Personal Lines Insurance Ltd (parent Abbey National plc) and Provident International Credit & Guarantee Co Ltd (Provident Financial plc).
In the light of significant changes in the risk industry in the last few years, Guernsey's Insurance Company Managers' Association (GICMA) is also changing “to adapt to the new challenges” by extending its membership.
GICMA says that, now that Guernsey's insurance centre is established as a global player, the association's composition should reflect all aspects of the captive industry. It looks to represent not just captive managers but owners, directors and organisations providing services to the industry. “Risk in Guernsey is an industry that is expanding and now embraces risk financing, alternative risk transfer, rent-a-captives and PCCs.” GFSC is supporting the move.
Commenting on the Guernsey captive market, Cullum Beaton, managing director, SINSER (Guernsey) Ltd, says, “Although the recent soft market may have affected captive development in Guernsey to some extent in 1999, overall I do not realistically believe that it adversely affected captives one way or the other. The soft market has existed for such a long time. Having said that, there are signs that the market is hardening in 2000. As a result there has been a flurry of activity in the last few weeks - we have had more new enquiries in the last three or four weeks than in the whole of last year. And I believe that I am about to witness a longer harder market than at any other stage of my career. “
Mr Beaton does not believe that the UK government's clamp down on designer rate tax regimes will have much effect on Guernsey's captive insurance industry.
“Designer rate taxes and PCC legislation are the kinds of things that it's very useful to talk about with clients but companies vary quite considerably in terms of their appetite to use them. By and large, people form captives for genuine risk management reasons. If they can reduce tax, they will take advantage of that situation. Despite tax concessions being pared away over recent years, captives are still here.”
Controlled foreign company (CFC) tax legislation has made the transfer issue critical in domiciles such as Guernsey. Don Lawson, director of IRM (Guernsey) Ltd explains: “Captives writing direct business have to comply with the requirements of the transfer pricing legislation. This means they must be able to prove that they are charging a competitive market rate for the risk concerned.”
He sees continued scope for PCCs and captive insurers in general. “We anticipate the use of PCCs expanding as people become more familiar with the concept of cell arrangements. A particular advantage is that a company would not normally need the same amount of premium that it would require to justify a captive.
Establishing a cell or renting a cell can provide it with a ‘mini captive' without the same capital commitment and is an option for companies below the top 300 in the UK. These companies are also becoming more and more aware of the need for risk management and risk management and captives generally go hand in hand. The cell concept may be their answer.”The legal question mark, ie that an action arising in connection with one cell might be brought against the cell company as a whole, does not appear to have impeded the growth of PCCs. Certainly, PCCs set up under Guernsey legislation should not encounter any legal difficulties in a Guernsey court.
Mr Lawson says that it appears that companies are using their captives for a broader spread of risks. “When captives first came into being, they were mainly used for property and marine business - those types of risks where there was a chunk of premium but fairly low claims frequency.
They then developed into writing other classes where there is greater claims frequency, such as employers' liability, in order to avoid ‘pound swapping' with insurers. A more recent development is to consider risks that have not, in the past, been traditionally insured. It is possible these would be blended with other exposures into a single multi-line programme.”