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Thursday, 17 February 2011

Guernsey hopes for captive boost through Solvency II opt out

By Adrian Ladbury
Email Author

Guernsey believes that its decision not to seek equivalence to Solvency II could help spark a migration of captives from ‘onshore’ EU domiciles such as Dublin and Luxembourg because costs should still be lower on the island for captive owners despite the likely rise in fronting costs for those that write EU business.

Peter Niven, Chief Executive of Guernsey Finance

The island’s captive community is convinced that the higher costs that Solvency II will bring for captives are wholly unnecessary and that there is no point in imposing such costs on Guernsey captives that cannot write business directly into the European Union without using a fronting insurer currently anyway.

Guernsey finance leaders are convinced that its decision to opt out of Solvency II and rely instead on its Own Solvency Capital Assessment (OSCA) regime and standards based on those issued by the International Association of Insurance Supervisors (IAIS) with which it is a signatory to the Multilateral Memorandum of Understanding (MMoU) will do it no harm with captive owners. Indeed, they report that captive managers on the island have already received queries from captive owners in EU domiciles that are interested in setting up reinsurance vehicles in Guernsey.


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“Solvency II has been designed to address issues mainly related to systemic and group risks within commercial insurance markets. These are risks not generally faced by Guernsey-based international insurance companies, where there are a large proportion of captives. Under the current proposals, Solvency II is set to impose a blanket set of capital requirements and therefore equivalence would burden Guernsey insurers with unnecessary additional costs and render currently effective captive business plans uneconomic. As such, there would be no significant new sources of business attracted to the island by equivalence and indeed, the opposite may prove to be the case,” Peter Niven, Chief Executive of Guernsey Finance, the promotional agency for the island’s finance industry told Commercial Risk Europe this week.

“Guernsey has made its name as the leading captive insurance domicile in Europe by being independent and as such, being able to offer something different to the commercial insurance markets. Not seeking equivalence ensures that this will continue. Guernsey was one of the first jurisdictions to introduce a risk-based approach to regulation and in recent years this has developed with the introduction of the Own Solvency Capital Assessment (OSCA) regime. We will continue to meet the standards of the International Association of Insurance Supervisors (IAIS) but the principles of proportionality mean we will provide a more attractive environment for captive owners and other niche insurers,” continued Mr Niven.

Mr Niven pointed out that Guernsey is not a member of the EU and so captive insurance companies domiciled there cannot currently write business directly into the EU. The decision not to seek equivalence means the position is not effectively changed and any Guernsey captive that wants to write Europe business will have to continue to use a fronting insurance company which meets the Solvency II requirements.

The fronting insurers will incur extra costs because of Solvency II and some of this will be passed on to customers. But Mr Niven said that the Guernsey market does not think that this will be a big problem particularly when stacked up against the benefits of being able to offer a more proportional regime than that which the EC appears to be currently planning to introduce under Solvency II.

“This may mean that the costs are passed on but we do not see this as wholly different to what happens currently and therefore it will not be a major problem. In fact, we believe that offering a regime which is more proportional to the business models of captive owners and other niche insurers may prove attractive for captive owners and their insurance vehicles currently based within EU domiciles, such as Dublin and Luxembourg—our two major competitors in Europe, and especially where they are writing business outside the EU. I have also heard that some service providers are already receiving a number of inquiries from firms looking to establish reinsurance vehicles on the island,” said Mr Niven.

Bermuda and Switzerland were keen to jump on the Solvency II bandwagon and have been accepted as candidates for the fist wave by the EC. But Mr Niven said that this has been done primarily to protect their international commercial reinsurance industries and not their captives.

“In each case they may be looking to mitigate the effect of additional regulatory burden involved through the exclusion of captives specifically or the application of so-called proportionality principles that the European Captive Insurance and Reinsurance Owners Association (ECIROA) and others are looking to have included within Solvency II. The progress of all of this debate will be followed with great interest,” he said.

A fuller version of this story will appear in the March issue of Commercial Risk Europe.



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