Ben (00:05)
Hello and welcome to the Guernsey Finance Podcast. I'm your host, Ben Perfitt.
This podcast features interviews with leaders from across the global finance industry, sharing perspectives on the issues and innovation shaping the future of finance. As a leading international finance centre, overseeing more than one trillion assets, Guernsey is known for its expertise, innovation, and global connectivity. If you'd like to explore our commitment to sustainable finance, you can also tune in to our Sustainable Finance Guernsey podcast. Today I'm pleased to be joined by three leading voices from GIA.
the Guernsey International Insurance Association. We have Richard Paris-Smith, Client Services Leader at Strategic Risk Solutions, Christina Bell, Executive Vice President at Davies, and Ben Davies, Senior Underwriter and Client Manager at Willis Towers Watson, to discuss all things captive insurance.
Ben Perfitt (00:55)
Everyone, welcome to the podcast.
So to start us off and provide any listeners who may not already have some context, what exactly is a captive insurance company?
Richard (01:08)
So generally speaking, a captive insurance vehicle is I suppose that the most simp to put it simply, it's an insurance company or a cell owned by a company or a group of companies. And it ensures specifically the group risks. it can write all classes of business. But essentially it's a regulated insurance company, regulated in the domicile where that insurance company is based and is used to service the insurance needs of the parent group, the group that owns the captive. I wanted to just mention that the term captive can also be used in the context of niche commercial insurance solutions for MGAs and brokers, which I think we might talk about later on in the session, but generally speaking a captive insurance company is viewed usually as insuring risks of a non insurance parent group.
Ben Perfitt (02:16)
Okay, so it's essentially, for all intents and purposes, an insurance company. However, it ensures the risks of that company that set itself up, that set it up essentially.
Richard (02:27)
Yeah, that's exact yeah, exactly. So it it really tries to operate on commercial lines, but it provides an alternative to paying premium away to the traditional insurance market and you're effectively paying premium into your own insurance company, and then that will insure your risks and pay claims which are validly insured into that company.
Ben Perfitt (02:53)
Okay, thank you. And are there certain industries, types of companies that set these up or is it just across a broad spectrum of industries and companies?
Richard (03:05)
Yeah, I mean a very broad spectrum really. There are no specific sectors. All sectors use captives. And actually, although they tend to be large groups, there's no specific scale. They can sometimes be a single company operating in one region, say the UK only, for instance, or they can be global groups.
So very broad application really.
Christina Bell (03:36)
And I think probably also just to add to that, might not necessarily be the corporates and and large entities as you alluded to there, Richard, but also private individuals, high net worth individuals, so literally extremely broad spectrum.
Ben Perfitt (03:59)
Okay, thank you. yes, it's not a single industry business, et cetera, broad spectrum of companies. So going back to the motivation, as it were, like why do companies not just ensure or purchase insurance, sorry, in the commercial market? Why do they set these entities up?
Christina Bell (04:19)
So in essence there are many reasons why a captive would be set up and risk retained through a captive. There's so many, but I'll just touch upon a few of them. I mean fundamentally one of the main purposes is because a captive creates an opportunity to retain underwriting profit and not lose that to the commercial market and particularly where a an organisation has a good loss experience, typically the commercial market may have done extremely well and profited over that. And this is a mechanism by which some of those profits can be retained internally within the group as a whole. And also when whilst retaining those within the group, you can also utilize that those funds and opt for investment income and manage those funds in order to achieve that investment income goal. Other reasons really are ways to access the reinsurance market. So there are so many benefits if you can actually access the reinsurance market from the aspect that it's additional capacity. The capacity from the reinsurance market can sometimes be more cost efficient and cheaper premiums. Not always the case, very much depends, but there's an opportunity there to be explored. And the captive can also insure risks which would be deemed in uninsurable in the commercial market.
So it's been typically used over the years to incubate risk with a view to sharing it with the commercial market once the dividends to demonstrate good loss experience. I think what I should also mention here though is that captives have become progressively much, much more of a primary strategic tool to manage an organisation's risk profile.
And at one point you'd see a captive being utilized to plug gaps in the commercial market or gaps in the program where the commercial market can't provide cover. Now we're seeing sort of the reverse happening and that we're seeing a a captive first approach whereby the captive is the default mechanism or the default location to ensure group risks.
And then after that consideration is given to the reinsurance and other ways that the commercial market can provide support to the captive.
Ben Perfitt (07:19)
Great, thank you. So it sounds like there's been an evolution of captives and where now they're used for many different purposes. kind of going back to one of your first points, is it essentially like backing your own company in terms of this risk management? Like fundamentally, there's an advantage of you retaining some of your own risk.
And that's kind of the foundation of why you're not paying out to the commercial market, as you said at the start, because you feel you economically, you can retain some of that profit that would go out to a standard insurer.
Christina Bell (07:58)
Exactly, exactly. So where you're retaining the risk where you feel that the group has got a really good handle on you know the the the loss experience etcetera, the profit that goes with that will be retained within the organisation as a whole.
Ben Perfitt (08:18)
Yeah. Thank you. And you mentioned incubation of risk as well. So it sounds like it's a useful tool for companies to be able to hold risks that they may not be able to get in the commercial market because they don't, the commercial market don't have the experience with that industry or your own company. So it's a useful place to retain risk. And as you say, build up experience that then you can show the commercial market to get rates if you haven't been able to get cover or at least favorable rates following kind of the experimentation within your own company.
Christina Bell (08:56)
Absolutely. Yeah, very much a mechanism to demonstrate to the commercial market as to what can actually be done and be achieved and yeah, I think that that's probably been one of the most beneficial aspects over the past number of years and continues to be so.
Richard (09:16)
I think
Richard (09:18)
sorry, I was just gonna say a practical example
Christina Bell (09:19)
Okay.
Richard (09:20)
of that. I always think or a good example over the last couple of decades was cyber insurance, where the market was extremely sensitive and tailored and not well established. And a lot of captives I think got involved in providing primary levels of cover at a sort of on a broad basis that helped the insurance market kind of refine and define its own product really.
Christina Bell (09:48)
Yeah. And also, you know, that's it was exactly the case for the cyber market some ten, fifteen years ago. And now moving on to AI, are we actually going to see that with AI? Will we see the captives taking a a role there? I think that's yet to be determined, but certainly one to watch
Ben Perfitt (10:14)
Thank you. So I asked a question before around, you know, in terms of companies, industries, businesses, that it suits a captive to set up. Are there certain lines of business that have been bread and butter in the captive world? You mentioned cyber kind of has come into captives over the last decade or so. AI, let's wait and see. But are there lines of business that you put into a captive and other lines of business that you are not suitable to putting into a captive?
Christina Bell (10:47)
I would say yeah, definitely. typically in the past you've seen lines of business such as you know the property and casualty lines and then as you know as a parent company wishes to explore more and deploy capital into into other lines, usually exercises have taken place as to what actually makes sense to put into the captive. and we've seen you know everything from as Richard alluded to there cyber to other liability lines, marine, auto
Ben Perfitt (11:32)
Mm-hmm.
Christina Bell (11:33)
etc. So a lot of the standard lines but also a lot of the non standard lines and coverages that you just wouldn't see in the commercial in the commercial market.
And obviously we've seen over the years many of the larger corporates expand into an involvement of placements for employee benefits into the captive as well. So I think we've typically seen that over you know across the across the globe.
Ben Perfitt (12:06)
Thank you very much, Christina. So now if we kind of look at it from a practical perspective, can you walk us through how a captive works in practice, know, right from premium collection to the claims and you kind of touched on reinsurance before, but yeah, in terms of how does it work practically?
Ben Davies (12:28)
Sure. I mean it's really no different to that setup as you would have with a traditional insurance company. The only thing is you're replacing the traditional in insurance company with your own insurance company, which is the captive or cell vehicle. so in the example of premium collection, the business would pay the premium to the captive or the sell in the same way that it would pay to a the commercial market. the actual premiums themselves they need to be reflective of a commercial market premium. So if you set up a captive you can't just pluck a figure out of the air. It needs to be what what's called arm's length pricing and it needs to de to be able to demonstrate that it's comparative with what is available in the commercial market. And then it would be paid in the same way as it would be paid to a normal commercial in insurance company. And again, moving on to claims, it would be the same process. So if a claim arises the captive or sell vehicle would pay the claim back to the insured who is the company who set up the vehicle in the first place.
Yes, there would be the same processes at at work as would be the case in the commercial market where the claim would be assessed, it would be adjusted, usual lot loss adjusters and claims administrators involved if if they've been appointed. but it really would be the exactly the same process.
In not every case does the captive retain all of the risk. there are frequent occurrences where where the captive actually chooses to pass some of the risk to the reinsurance market. and that is a very, very straightforward process because a captive NSL in Guernsey can access the reinsurance market directly. So it can ultimately decide how much of the risk it wants to retain in the vehicle. And then for those losses which are significant or quite volatile, it can then choose to reinsure those to the reinsurance market. So yeah, pretty much a very similar process as you as would normally happen within commercial in insurance.
Ben Perfitt (15:14)
Thank you, Ben. So from your explanation, my understanding then is that a captive insurance company works exactly as an insurance company would operate, bar the obvious point that we've made in terms of the risks its writing are for its parents or an affiliated company. But in terms of the price of the premium, that's in line with the commercial market. In terms of how claims are made and then run through, they're dealt with exactly the same way as would a normal insurance company operate. And they have to work like that to be regulated in whatever domicile they happen to be in. Is that correct?
Ben Davies (16:01)
Absolutely, absolutely. For all intents and purposes, a captive insurance company or indeed a cell insurance company, they are bona fidey in insurers. I mean, there's there shouldn't really be any difference because as you say the the regulations dictate that an insurance company needs to act and behave
in a certain way and that includes the solvency requirements that would be applicable to any insurance company around the world in various juris jurisdictions. Admittedly the solvency requirements will differ from one territory to another, but for yeah, for all intents and purposes, it's acting as a bona fide insurance company.
Ben Perfitt (16:55)
Thank you very much. And so within captive insurance world, what role do brokers, captive managers and other advisors play in making a captive successful?
Christina Bell (17:10)
well I very much see this as a collaborative effort, all acting in the best interest of the client. So a captive manager and a broker should work together with regards to what the program looks like, the best possible or the optimal program in an ever changing environment. So in the past you may have seen that some of brokers can see captives and captive managers as competition or even a threat. And hopefully with education and a greater understanding of the whole captive concept over the years, hopefully that sort of impression has gone and that you do see, I almost see it as a triangle.
In the fact that you've got the captive manager, the broker and the captive owner, as I say, all working together to to come up with the the best possible solution for the client. so it is obviously the captive manager's role to bring in those and and basically recommend other service providers and advisors such as auditors, actuaries, even board effectiveness specialists, etc., to bring those in for the the board to to consider, approve and move forward with, it's the the captive manager's role to ensure that all of those are working together and again all in the best interest of the client.
Ben Perfitt (19:10)
Okay, thank you, Christina. So the captive manager kind of sits at the centre of this all and goes out to all the other advisors, service providers. You mentioned brokers there and kind of puts all the pieces of the jigsaw into place. So in terms of the ultimate responsibility for the success of the captive, and when we talk about success, let's talk about solvency, for instance, at a very basic level. Whose responsibility is it for the captive to remain solvent you know, not go bust as it were.
Christina Bell (19:42)
Yeah. I mean ultimate responsibility and liability for that rests with the board. and the the board you know carries that liability but in doing so it is the captive manager and the captive manager's executive team and directors, the client service team, to be able to
ensure that they've got the correct specialists and the correct advisors etc for that. Probably the only exception being the tax advisor where that would fall with the parent company and the board to or the board of the parent, I should say, with regards to the tax elements.
Ben Perfitt (20:36)
Okay, great, thank you. So the ultimate responsibility is with the board, but the board kind of relies, not kind of, the board relies on the captive manager to advise them on all things essential to the operation of their captive, essentially.
Christina Bell (20:53)
Exactly. So essentially the board is will appoint those advisors under the recommendation of the captive manager.
Ben Perfitt (21:07)
Great, thank you.
Richard (21:08)
And think it might be worth just mentioning. Certainly in Guernsey, and this does vary from domicile to domicile, the insurance managers themselves are regulated by the same regulator
Christina Bell (21:20)
Yes.
Richard (21:21)
that regulates the captive insurance companies. And I think that's just worth bearing in mind. So yeah, we have a responsibility to the regulator as well as to the PCC board to make sure these things are right.
Christina Bell (21:33)
Yeah, yeah, that's a good
Ben Perfitt (21:33)
Understand.
Christina Bell (21:35)
point, Richard, and the relevant licensing and obligations that go and you know, that are imposed upon the captive manager to ensure that all of the criteria and the regulatory aspects are covered.
Ben Perfitt (21:52)
Great,
thank you. And a lovely segue to Guernsey. And Guernsey, last five out of the six review awards in Luxembourg has won the leading European domicile. Why has Guernsey become one of the leading centres for captive insurance globally?
Richard (22:13)
I think in a way I would say Guernsey always has been a leading player. So a couple of years ago we celebrated having a hundred year old captive, which obviously predated all forms of formal captive regulation, but Guernsey has been sort of at the forefront of captive development and solutions for a very long time. And I think in the sort of more recent era. It's as other domiciles throughout the globe, including Europe, have kind of got into captives, Guernsey has continued to lead and be at the forefront of that industry by developing new solutions. One example, one great example of that innovation is that Guernsey was the first ever domicile to create PCC legislation, which is now, you know, used in an awful lot of domiciles which have sort of focused in on captives, have also developed that kind of cell legislation. So so I guess it's just maintained its position by being flexible and focused on captives, really.
Ben Perfitt (23:39)
Okay, so Guernsey's so flexible and focused on captives. Does regulation play a part in Guernsey's success compared to other domiciles?
Richard (23:49)
Yeah, I mean it yeah, I would say it does, because it's always managed to strike the balance between strict regulation with a pragmatic approach. So it's not looking to be soft as a regulator, but equally it's looking to be supportive of the industry and that pragmatic but reliable and you know, well acknowledged regulatory regime is very important for the industry.
Ben Perfitt (24:26)
And is speed a factor as well, given that the legislation is for captive insurance? Does that play a factor in setting up locally?
Richard (24:37)
Certainly compared to to there's a there's a little bit of an onshore offshore dynamic there as to because over the the decades, you know, both across the states and across Europe, domiciles have invited captive legislation, whether they're part of the EU or part of the states. and as you know, the UK are now sort of looking into it.
But I do think that speed and agility, particularly with cell structures, has been a really fundamental point for Guernsey as it grew. And it continues to be the case.
Ben Perfitt (25:22)
Thank you very much. And you mentioned the PCC then and cell structures. How does a cell structure differentiate from a standalone captive? And when might a business choose a cell over setting up their own captive company?
Ben Davies (25:42)
I mean the kind of three main factors to differentiate between the standalone captive and the cell would be the nature of the ownership and the actual governance surrounding the two vehicles, the cost of the two vehicles and the speed to market. So from a governance perspective, a standalone captive will have a full board of directors dedicated to that entity and that will involve non executive directors based here on the island of of Guernsey executive directors maybe some representatives from the captive manager who manages the company and a chair lady or a chairman potentially along with sometimes underwriting committees, finance committees, enterprise committees, so it has the potential to be quite a significant operation. not only that the regulatory requirements are of a a higher level, I would say, than a than a traditional sell, because you you've got this these extra moving parts to the to a standalone captive, the capital base will be higher compared to a cell vehicle. But it does allow for a standalone captive to have that kind of flexibility and really be super focused to the risk management needs of its of its parent company. if we then move across to a cell company. A cell vehicle will not have its own dedicated board of directors. That will already be in established through the core of, let's say, the protected cell company. So that will already be in place. The actual costs are lower because of that, because you don't have to arrange for these representatives to be in place to oversee the operations of the company, it does lower the cost of running a cell company. It means that the administration is slightly lower, but essentially it does perform the same function as a captive, but just at an easy accessible point for potentially slightly smaller companies.
Sorry, Ben, you were gonna say something.
Ben Perfitt (28:35)
Yeah, I was going
to say, thank you. it sounds like it's speed to market is a reason.
Ben Davies (28:42)
Mm.
Ben Perfitt (28:42)
It's easier to access. So you're essentially accessing a company that's already been set up for you and you're entering into an agreement with that company that's already been set up, which is the core, I understand. And
Ben Davies (28:58)
Correct.
Ben Perfitt (28:59)
you take a cell within that structure. However, do you, lose some control then in the sense of like, terms of looking at differentiates with a standalone captive setup? it's obviously lower to set one of a seller.
Ben Davies (29:14)
Mm.
Ben Perfitt (29:15)
do you lose some control by not setting up your own company?
Ben Davies (29:20)
I would say no, unless the requests of the parent entity are completely out of line which with what would be e expected of an insurance company, then I would say no. I think the boards of the PCC tend to be quite flexible and open to the requests of the parent company. But similarly to a standalone captive, there needs to be the mindset that the solvency of the cell vehicle should not be compromised. The regulatory in integrity of the vehicle should not be compromised. And reputationally to Guernsey, we need to make sure that that you know remains. So if there was something that was recommended that was in a sanctioned country or something that involved something that the client due diligence meant that it was a risk that we were not willing to take then we wouldn't look to approve something like that. But within reason I don't see why there'd be any significant or material loss of control if you did form a cell vehicle.
Richard (30:49)
I think but just Ben on that point, I completely agree with you. I think formally on paper the PCC board controls all of the cells within a PCC. You know, that's absolutely the formal position. But it's a cell is a strategic tool as Ben outlined in just the same way as an insurance captive is. And if it doesn't meet the needs of the parent, then you know there's not much point to it.
So it's just a formal
Ben Davies (31:20)
Mm.
Richard (31:21)
position versus a practical position, really.
Ben Davies (31:25)
And if the parent entity was seriously concerned about they wanted more control over their cell vehicle, there's nothing to stop them from transforming their cell vehicle into a fully fledged captive if they wanted to. it may involve some increased costs associated with the running of the company, but you do have the option to do that if a parent company wanted to.
Ben Perfitt (31:56)
Yeah, understand. So in terms of the example you gave Ben, so we're looking at an organisation or a company accessing a cell in Guernsey from an already formed PCC. Are there also instances where a company will set up their own PCC and use different cells for different parts of their business?
Ben Davies (32:18)
Absolutely. Yeah, no, it's very common practice to split up certain elements of the business's risk within a cell vehicle. that might be different risks, whether that's a cell for property and business interruption, another one for a motor line of business. the other common way to separate the cells is potentially via different territories. Or so you may have your operation in Australia. So the risks associated with the business units in that region will be ring fenced in one cell, your North American business units in another cell, and Europe in the next. So there's multiple ways to do it, and that would be up to the parent company on how they choose to actually organise it.
Christina Bell (33:15)
I think the one that I've seen most typical is where a a parent company has wanted to and this makes full sense to separate out the employee benefits risks, the employee benefit program being usually quite involved, complex, etc, and to ring fence that completely separately. So I think well we've definitely seen that a number of on a number of occasions.
Ben Perfitt (33:45)
Thank you very much. Slight shift then. We hear lots of talk around brokers and MGA setting up vehicles in Guernsey. Can someone explain to me how this works in practice and why are they doing that?
Richard (34:06)
Yeah, I'd like to take that. yeah, so insurance brokers and MGAs tend to build up established books of business, either for a particular line of business or a particular industry or a particular region, and they, you know, they know their business really, really well. And over the years they grow and develop a client base that they really have a deeply specialised knowledge and awareness of and they basically take the premium from those clients and pass it over to an insurer or or many insurers. And they I think at some point of the evolution of that business, there's a time when brokers or MGAs would think that they could enhance the overall product that they're selling to their client by actually taking some skin in the game, I suppose, to put it one way. so what they can do is they can set up an insurance company or a reinsurance company quite quite is quite a typical way of doing it through reinsurance, where they will go to their insurance market and just arrange with them to seed reinsurance to their own little reinsurance company that might be based, for instance, in Guernsey. And what happens there is it doesn't really disrupt the product that the customer's buying, but it A allows the broker to take a share in some of that underwriting profit that it's creating rather than just passive commission. But secondly gives them kind of a greater tie in and control to the insurance market that they use to insure that product in the first place. Does that make sense?
Ben Perfitt (36:12)
Yeah, absolutely. So traditionally brokers earn through commission. And this is a way of them earning in a different way, usually because they have a profitable book of business and they want some skin in the game, as you said. So in terms of like the reason to be, it's not too dissimilar from a captive insurance company setting up with a profitable book of business thinking, actually, I don't want to give all the premium away to the commercial market. I want to retain some of this. This is slightly different, similar reasons to start with in the sense of there's a profitable book of business here. Why are we giving all that away? Is that?
Richard (36:51)
Yeah, I would say it is.
Christina Bell (36:52)
Yeah.
Richard (36:53)
I mean, actually the the the numbers and the d the dynamics are very similar when you're looking at a book of business where a broker's setting up their insurance vehicle with a group using its own captive, and it's worth just mentioning that there are sort of disclosure requirements. So this isn't sort of like a secret share that's squirreled away of profitable business that that increases the price, to the customer, they generally speaking will disclose to the clients, look, we've got a share in a vehicle that's that's creating some of the capacity that sits behind the product that you're buying.
Ben Perfitt (37:39)
Thank you. just why Guernsey then in terms of these structures being set up on the island?
Richard (37:46)
I think it's all it's the same reasons, really pragmatic regulation. The regulator does treat those as a different category. They treat them as a commercial category of business. They recognise that it's not just a pure captive with a group ensuring its own risks. But so long as the controls and the solvency is there, they're again able to regulate that on a fairly pragmatic basis.
Ben Perfitt (38:18)
Okay, so if I am a broker or an MGA and I'm looking to explore this for the first time, what does my journey look like from the initial idea to implementing a structure in Guernsey?
Richard (38:33)
Yeah, but generally speaking, it's all about crunching the numbers. You'll talk to someone like us, you know, and and we'll work through the the numbers with you and we'll look at whether a reinsurance structure makes best sense or a direct insurance structure and just what the potential downsides are, what the upsides are. So to a certain extent it is all about the numbers and does it work in the long term as a sensible solution? and then,
Christina Bell (39:08)
I think.
Richard (39:09)
you know, that that admittedly might take it might happen quickly, but it tends to be a bit of a journey, which I think you might have said, and and you eventually will get to a point where there's a feasibility of doing that is assessed, and at that point, then you move into an implementation program to set up the captive and and take it forward.
Christina Bell (39:33)
I think just to elaborate a little bit on the you know, once you get to that element of the captive concept and trying to determine, you know, do you move this forward? performing the feasibility study just to give a little bit more depth as to what that entails. So really it's a benefit to cost analysis, and you're including in that risk identification, domicile evaluation, financial protections, licensing and regulatory considerations, solvency requirements, premium and loss reserving, so the whole the whole gambit, and then also taking into account what does the government's framework look like and what does the board composition look like. So all of those require sort of careful consideration. And then I think one aspect is before sort of pushing ahead, it's always beneficial to engage with the regulator just to get some insights so that they can have an understanding of what of what the whole project for want of a better word looks like and get their feel for it. And then of course choosing a captive manager. So once all those considerations have been made then really it then becomes an application for incorporation and licensing on the island and then you know looking at the and a big part of that would of course be the as you alluded to Richard would of course be the financial projections and essentially the five year business plan once approval is made then essentially moving straight into an an inaugural board meeting to get everything approved from the memorandum and articles right through to what the business is going to be written and then really the captive and/or the you know vehicle of whatever you know whether that's a category four, category five, whatever that structure is, and move ahead with that.
And I think the only other element that probably we haven't addressed there is the UBO, so the ultimate beneficial ownership and what that looks like to be able to get complete satisfaction with you know sign off from the compliance elements and all of the compliance and due diligence that that's needed to be done along the way.
Ben Perfitt (42:20)
Thank you, Christina. And I'm not going to hold you to this. And I appreciate it depends on the application that comes to you or the business that comes to you. in terms of timelines, can you give me a sense of how long this takes? You know, broad brush.
Christina Bell (42:40)
So I think it very much depends on I think the early stages very much depend upon the the captive owner or as we've been talking about you know in this instance the broker looking to gain skin in the game or an GA in in our instance. I'm we're seeing an awful lot of uptick in MGAs looking to take a participation that's probably sort of feel that we are in more. So if a client is or a prospective client is looking to push ahead it can happen pretty quickly. A feasibility study if you're to obtain this sort of like the full in depth feasibility study I think you've really got to allow sort of four weeks as a rough guideline to include all of the you know the in-depth analysis that needs to be done maybe four to six weeks and then once there is a decision to to move ahead and you're setting up a you know essentially a new start up the GFSC in our in our instance would say four to six weeks from receipt of all of the elements that they need for consideration. So all of the elements that are required in an application. So I think you would be talking bare minimum three months from initial captive concept to be up and running. That's probably sort of an ambitious target. Realistically when you've got all of the various meetings, scheduling, etc, you're probably talking you know, four to six months.
Ben Perfitt (44:44)
Thank you very much. And I imagine given the history of Guernsey and the fact that regulators sees applications coming through quite regularly, the process is relatively smooth, obviously, depending on the information being provided upfront
Christina Bell (45:04)
Exactly.
Ben Perfitt (45:05)
by the client to yourselves as the manager.
Christina Bell (45:08)
And I think it now is a good opportunity to also mention the fast track process. So if a client has a a or prospect has a particular need to establish a vehicle very quickly, the best way of doing that is through the PCC and to set up a cell, which can be done virtually overnight. and essentially that is the the the speediest and most efficient mechanism and we are seeing instances where that speed is essential and Guernsey has the ability to be able to accommodate for that speed and then if a later at a later date there is a need to essentially transform the vehicle from a cell into a fully fledged a captive that can be done down the line when there's a little bit more time. So I think Guernsey has the ability or definitely does have the ability to be able to accommodate all needs and use and what I described initially is probably where you've got a parent company taking into account all of the considerations. But if you're skipping straight into we need a vehicle and we need it now, then Guernsey can accommodate for that.
Ben Perfitt (46:31)
Great.
Richard (46:31)
Can I just if you don't mind, can I just make a point that I think it relates to what you've just said, Christina, which is that the, you know, I believe the best way to have a smooth application is that the manager who does these things sort of day in and day out knows that it has all the information. So by the time we submit an application to the GFSC, we're very confident that it'll get through because we've asked the questions and preempted what, you know, the hiccups
Christina Bell (47:04)
Yeah.
Richard (47:04)
that might arise. And that goes right down to a fast track application that really is urgent to, you know, any normal application. Because if we just took what we got given and shoved it into the regulator without really paying attention to it, you can bet that problems would probably arise because we've got that sort of collective experience.
Christina Bell (47:31)
Yeah, no, fully agree, Richard. Totally agree with that point. Thank you.
Ben Perfitt (47:36)
So we've looked at what captives are, what PCCs are, why Guernsey is at the forefront of this in Europe and globally, touched on MGA's and brokers setting up to get a slice of the pie, which they'd usually just commission from. And looking at the practical applications and also as you said, in terms of setting up a vehicle on the island, how that works with the regulator. If I can come to you now, Ben, when you think about the captive insurance industry and cell structures, what do you see in terms of misconceptions people may have within this business?
Ben Davies (48:24)
That's a that's a really good question, Ben. I think the main one is probably that because these vehicles tend to be based in offshore jurisdictions such as Guernsey, that these are methods for corporations to avoid tax. Now this is quite a lazy stereotype the that people use and completely false. And I think the recent events of particularly in Europe where we've had Italy, France, and now the UK forming captive regulatory frameworks in onshore jurisdictions that categorically proves that it's not necess you know it's not a way to avoid tax. It's the jurisdictions traditionally have been located offshore to allow these entities to be to be managed and located in Guernsey and similar domiciles. But we've now seen recently that these regulations are have been developed in mainland countries removing that critique to these to these vehicles. The list does go on. I think there's an element of mystique, which I think part of today is what we're trying to remove around captives and cells. I I think the other main one is probably that the only companies that set up these vehicles are mega global entities. but hopefully as myself, Christina and Richard have talked about today, the cell vehicles mean that it is available to smaller companies. And I wanna kind of caveat that and and manage people's ex expectations because you do need a certain level of risk and a certain level of premium income in order to justify looking to establish a cell vehicle, but it is a lot less than setting up a full captive entity. as a very broad rule of thumb, I'd say companies who are spending between one to five million plus in annual premiums across multiple lines of business would be suitable to set up a fully blown captive company. whereas for a cell vehicle, I would say a rough premium spend of between 250,000 to a million, you would be able to justify setting up a cell vehicle. And those are very rough numbers. I think it's important to take into consideration the fact there are some regulatory fees associated with forming your own in insurance company. And then ourselves as captive and cell managers would also charge a fee. And I mean I again it's very, very difficult to provide an indication of what that might be, but as a very minimum we'd be looking at kind of, you know, ten, twenty, thirty thousand as an absolute minimum. But that would vary depending on the client and and the risk that that we would be looking to manage. another misconception is around the purpose for setting up these fit vehicles is to reduce the cost of insurance. Actually more often than not it's to focus in the risk management strategy of the parent company to allow them to identify where they can make improvements to the risks and hopefully either eliminate them or reduce them so that maybe they don't even need to in to ensure the risk at all. I mean that's the kind of perfect scenario. so yeah.
Ben Perfitt (52:59)
Thank you, Ben. So it sounds like there's a bit of mystique around captives because historically and traditionally they've been set up in domiciles such as Guernsey where people perceive them as being light on tax, whereas actually the reason they have been set up in these jurisdictions is because of the regulation that's been designed specifically for captive insurance, whereas
Ben Davies (53:25)
Correct.
Ben Perfitt (53:26)
in the UK and in mainland Europe. They haven't been specifically designed for captive insurance.
Ben Davies (53:32)
Yep. And we can see that now changing, as I mentioned, France, Italy, the United Kingdom. And I would expect to see more countries enabling the formation of captives and cells globally. I mean we've in the not too distant past we've seen the mainland US, you know, t traditionally it was maybe Bermuda, Cayman. But now we've got states within a mainland USA who are enabling the regulatory framework to form these these vehicles and it's been really popular.
Ben Perfitt (54:13)
Yeah, and that's something we hear often in terms of captives coming into the mainstream. Do you see this regulation in the UK and in Europe kind of part of that narrative in terms of capture insurance coming mainstream? Yeah.
Ben Davies (54:27)
Absolutely. Yeah, and it's validating and justifying what Christina and Richard and I and the rest of the insurance community on Guernsey and other domiciles have been kind of banging the drum about for years. But it's actually really coming to fruition now to say, look, this is what we can offer you. I know I speak on behalf of the Guernsey insurance community to say that we are supportive of these mainland jurisdictions forming, it's fine. We know that the strengths that we have here in Guernsey that Richard mentioned earlier on in this in this podcast. And you know, we would welcome any business or company around the world who does want further information on this, to approach us if if they want.
Christina Bell (55:25)
I think just to sort of circle back the the aspect of you know misconceptions and demystifying the element that captives are now becoming mainstream and being considered in so many jurisdictions, not just offshore jurisdictions, it helps the whole cause of you know literally demystifying the captives. There's a lot more talk about captives as a whole and you know I think that you've got people that are looking now into captives that probably wouldn't have done so in the past.
Ben Perfitt (56:07)
Thank you, Christina. Richard, do you have anything to add in terms of the UK captive regime coming into place? And also, just generally broader in terms of where you see captive and sell vehicles over the next five to 10 years, should we say.
Richard (56:27)
Yeah, I do really think to me there are kind of two prongs of mainstreaming that we're seeing. The first is what we've just been talking about, so the validation, I suppose, of what captives really are and what they're aiming to do by mainstream domiciles adopting similar legislation and actually copying what we've been doing in Guernsey for years and years.
I think it is a positive development. But I think alongside that, another thing we're seeing amongst risk managers and you know the the stakeholders of captives is mainstreaming the captive utilization itself, which I think we've probably referred to earlier as well. But what I'm talking about, this captive first approach, I think is a real thing. It's a shift from having a sort of niche vehicle that we might use opportunistically to having our own insurance vehicle as a group being the centre of our risk management and insurance buying strategy. And I think that, you know, those two things combined will create plenty of movement and developments in their own right.
Ben Perfitt (57:53)
Mm-hmm.
Richard (57:53)
of the
captive market over the next few years.
Ben Perfitt (57:57)
So the captives kind of we touched on again in terms of the evolution of them from relatively simple risk financing tools to now becoming central and fundamental to a business, not just of large organisations, but as you touched on Ben earlier in terms of organisations that are much smaller than people actually imagine setting up a captive or a cell, so in terms of looking ahead, is there anything else that you see in terms of the captive landscape or what you're seeing on a data tape basis that is interesting or excites you in terms of this industry?
Christina Bell (58:44)
think the whole the
Ben Davies (58:44)
I think
Christina Bell (58:45)
whole aspect of you know wider domicile approach is an element and I think that in that respect Guernsey can can focus on what what Guernsey does best which is the innovation and tailor made solution aspect and I think the experience that's you know that is here on the island enables and and the evidence behind that been demonstrated with in so many instances of real bespoke solutions, I think that you know that's an exciting element going forward.
Richard (59:31)
think technology as well in AI. I'm only going to make a very generalised comment about this, but I think you know the world is changing. We all know that. And I don't want to cause offence either, but the insurance industry I think is quite tradition and steeped in very good tradition and learning as it goes along and and so on. But I do think the way that technology, including obviously AI develops captives as part of this fundamental solution is gonna be fascinating, you know. But I know that's a generalised comment, but it's worth saying.
Ben Davies (1:00:11)
Yeah, absolutely.
Ben Perfitt (1:00:11)
Absolutely.
Ben Davies (1:00:12)
Just to reinforce both Christina's and Richard's points, I think captives themselves are uniquely positioned to provide coverage for those emerging risks, however they present themselves. I know Christina earlier in the podcast mentioned cyber risk, but I think with the supply chain risks that have emerged literally over the last couple of years, we've spoken about AI. Sometimes these risks are you either cannot place them in the commercial insurance market or the terms provided by the insurance market are very limited or the premium that is being charged is disproportionate to the risk, which makes it uneconomical to actually cover the risk.
And I think that's where captives and sales can play a key part in whether it's incubating these risks to demonstrate a good claims record and then be passed back to the commercial market or purely in insuring them on a direct basis or indeed a reinsurance basis as we've spoken about, to provide this cover to to companies.
Richard (1:01:37)
So it's really it's it's new risks and new solutions and the whole treatment
Ben Davies (1:01:41)
Mm.
Richard (1:01:42)
of data being part of the solution as well as part of the risk is a great era to be going into, I think.
Ben Davies (1:01:51)
Yeah.
Ben Perfitt (1:01:52)
Great, so yeah, emerging risks, data, technology, you know, all part of what's ahead in the insurance world. And it sounds like captives are gonna be fundamental in all of that, given their position, you know, fundamentally and central to the businesses that set them up. So that all sounds really positive.
Christina Bell (1:02:13)
I think so from and particularly we've come from many years ago when captives literally, as mentioned before, were there to plug holes and a lot of people were or sat up a captive in a hard market. I think those days come. and you know it is a much greater involvement now these days.
Ben Perfitt (1:02:39)
Great, well that brings the end to today's episode. Thank you Richard, Christina and Ben for joining us and sharing your insights on how captive insurance is applied in practice. And thank you all for listening. You can find more episodes of the Guernsey Finance podcast on your preferred platform. We have links to SRS, Davis and WTW in the show notes. We look forward to bringing you the next episode. Thank you very much. Thanks guys.
Richard (1:03:07)
Thanks.
Bye.
Christina Bell (1:03:07)
Thank you,
Ben Davies (1:03:08)
Thanks.
Christina Bell (1:03:08)
thank you.
Ben Davies (1:03:08)
Cheers, Ben.
