Wednesday, July 24, 2024

Membership options

Guernsey-on-Thames, the existing solution for London

John Rowson, Independent (Re)insurance Consultant

I have read with interest numerous articles discussing the possible Brexit Bonuses available to the UK. Principle among these bonuses is refining Solvency II regulation to better reflect the UK’s leading global (re)insurance industry.

I understand why these commentators see Solvency II as being an unnecessarily burdensome regime with regards to reinsurance, where most contracts are bespoke and each cedent and intermediary have credit committees that make a detailed assessment of the risks presented by each deal/counterparty.

Much has been said about Solvency II as a European project, which in order to work needs to take account of the regulatory environments of all 27 member states. Like many documents written by committee, this can leave the final piece of work overbearing and hence the current UK review of (re)insurance regulation.  

Bermuda is often used as a possible model for the UK to follow. Bermuda is deemed “equivalent” and follows much of Solvency II albeit with a bifurcated approach. Large commercial insurers and reinsurers must undertake much of the Solvency II compliant regulatory regime.

Whilst there is no doubt that London’s (re)insurance market would benefit from deregulation, there will always be a need for proportional regulation that is risk-based while facilitating the international flow of capital.  

It is therefore worth mentioning that much closer to London, only a 45-minute flight and in the same time zone there exists a burgeoning and innovative reinsurance market that can support London’s aspirations. Guernsey has a long history of insurance excellence, indeed the first captive was formed in Guernsey over 100 years ago in 1922 and in 2023, Guernsey surpassed Luxembourg to become the domicile with the greatest number of captives in Europe.

Guernsey has innovated far beyond the realms of captive insurance and is perhaps best known for introducing Protected Cell Company (“PCC”) legislation in 1997. This legislation has been very useful in reducing the costs of setting up ring-fenced (re)insurance arrangements for individual transactions or smaller companies.

The recent Vesttoo investigations have increased interest in the Incorporated Cell Company (“ICC”) which was introduced to the Guernsey statute books in 2006.

ICCs have always been popular with European sponsors of reinsurance companies in Guernsey, as they permit the legal segregation of the assets and liabilities in each cell, but in a more traditional form of corporate entity. The ICC structure, much like the PCC legislation that preceded it, also creates economies of scale and reduced costs.

Guernsey has always been a proponent of proportional regulation and indeed never adopted Solvency II.

Instead, it has always taken account of and respected International Association of Insurance Supervisor guidance. These guidelines have been proposed as a possible model for the UK to follow.

Accordingly, in choosing Guernsey, reinsurers might well find all of the advantages of the proposed UK regulatory changes awaiting them.  Indeed, Guernsey already regulates the capital requirements of insurance and reinsurance companies differently.  It sets the capital requirements of reinsurers at a level adjusted to take account of the sophisticated nature of reinsureds, which in effect means they hold less capital than insurers.

I would therefore suggest that Guernsey provides a knockout option for global reinsurers.  This hugely benefits the flow of international reinsurance capital in and around the London market.