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ST. PETER PORT, Guernsey-Guernsey's continued push for geographic expansion and legislation allowing a new insurance vehicle could further fuel its captive growth engine, which remains in high gear.
Another law that took effect this year makes it easier for captives to enter and leave Guernsey.
Steve Butterworth, Guernsey's superintendent for financial services, predicted a year ago that captive growth would slow and Guernsey would license 20 captives in 1996. The domicile actually added a Guernsey record 40 new captives to its roster last year.
This total quashed Mr. Butterworth's assessment of a year ago that Guernsey probably would cease to be Europe's fastest-growing captive domicile. As it turned out, 1996 marked the seventh consecutive year in which Guernsey led Europe's captive growth, enabling the island to remain the continent's captive leader.
With 11 captives surrendering their licenses in 1996 due to mergers or acquisitions of their parent companies, Guernsey's net gain was 29, bringing its total to 324 by year end. At the end of 1995, Guernsey had a revised total of 295 captives.
Three more captives have formed in 1997, and Mr. Butterworth says six more are "in the pipeline."
Figures on 1996 captive premiums were not available for this report, but Mr. Butterworth expects the combined total for 1996 to be about 22% above the 1995 figure of 1.5 billion pounds($2.33 billion). Total assets at the end of 1996 are anticipated to be about 4.30 billion pounds ($7.23 billion), up 20.4% from the previous year.
The United Kingdom remained Guernsey's largest source of new captives-25 out of the 40 formations. However, the U.K. representation is a lesser proportion than in past years. Last year, six captives came from European parents outside the United Kingdom, four from South Africa and one each from the United States, Australia, the Middle East, Ber-muda and the Far East.
Partly in response to its growing captive numbers and partly as a result of its commitment to geographic diversification, Guernsey last summer hired John Darwood, former deputy inspector of insurance in the Cayman Islands, as senior adviser in the Insurance Division of the Financial Services Commission.
Mr. Butterworth said Mr. Darwood, with whom he worked in the Caymans, brings familiarity with the U.S. captive insurance industry and other worldwide contacts, which will assist Guern-sey's efforts to diversify its captive base.
Among notable registrations last year was a captive to underwrite low-risk liabilities for the U.K. Post Office. The Post Office is the second U.K. government body to start a Guernsey captive, following London subway network operator London Transport's 1995 formation of London Transport Insurance (Guernsey) Ltd. to underwrite employee and public liability risks.
U.K. building societies, similar to U.S. savings and loan institutions, continued to use Guernsey as a captive location. This sector became important a few years ago after building societies turned to captives when the U.K. reinsurance market withdrew from writing mortgage indemnity guaranty business after heavy claims at the end of the 1980s.
Having set up a mortgage indemnity guaranty captive in 1995, the Halifax Building Society, Britain's largest, last year became the first society to set up a captive to protect mortgage holders from negative equity.
The new captive is termed a Personal Lines Insurance Body, or PLIB, which enables Halifax to undertake a wide range of insurance activities-though initially its business will be restricted to writing negative equity insurance.
Howard Posner, general manager-general insurance at Halifax, cited three key reasons he chose Guernsey.
"First, we already had a captive there and were satisfied with the management of that company. Also, the local regulation is stronger than in other competing domiciles. Another point was that Guernsey is easily accessible from our headquarters in the north of England," he said.
Mr. Butterworth said he sees the potential for further growth in business originating from U.K. building societies.
"I see building societies setting up separate captives for maybe some sort of commercial advantages, rather than traditional risks," he said.
Possibilities could include more societies setting up captives to insure against negative equity in property and against other problems caused by fluctuations in the financial markets.
Nick Wild, managing director of International Risk Management (Guernsey) Ltd., which manages the Halifax captive, said there is opportunity for PLIBs to be used for other niche sectors of personal lines risks. These could include such risks as household insurance, credit cover, and possibly an automobile account, he said.
Guernsey also has gained a new alternative insurance market operation and a new captive management operation. They are part of a joint venture between Mutual Risk Management Ltd., a Bermuda-based risk management service company, and Guernsey-based Wilde & Co. Insurance Managers Ltd.
The first, which will be a branch of Mutual Indemnity (Bermuda) Ltd., will offer facilities to clients of brokers, agents and corporate risk managers seeking an alternative to traditional commercial insurance. These could include self-insurance or captive insurance programs.
The new captive manager, Mutual Risk Management (Guernsey) Ltd., will handle the promotion and administration of MIL's branch operation in Guernsey.
Simon Scupham, MRM president and chief executive, said Guernsey was selected because it is "one of the world's largest and fastest-growing captive insurance centers. . .has an excellent infrastructure and is well-regulated."
Although Guernsey is trying to broaden the geographic spread of its captives away from the United Kingdom, this one source still accounts for 80% of its captives, a proportion unchanged from 1995. However, that may change in the face of U.K. legislation passed last year that makes it less tax-favorable for U.K. companies to form captives. The law has raised concerns in Guernsey.
The legislation, which would affect U.K. captives in every domicile, applies to U.K.-parented controlled foreign corporations, requiring them to remit for tax purposes 90% of their annual taxable profits, minus capital gains and foreign taxes, rather than the 50% remittance previously required.
Mr. Butterworth's second-in-command, Senior Analyst Diane Potter, who overseas Guernsey's captive sector, acknowledges that the CFC legislation is slowing growth of U.K.-parented captives, but she pointed out that "It's difficult to say who didn't come because of it."
Mr. Wild said that while initially there was a normal "knee-jerk" reaction of concern over the legislation, now that it is in place, "Everybody has been pleasantly surprised."
He maintains: "For too long people have taken business decisions on the way the captive is run in order to satisfy that 50% ruling. I think that was wrong. Just to satisfy a tax position, they made certain decisions that they might not otherwise have made."
Mr. Wild said personally he finds it "refreshing" that people are now encouraged to operate a captive more for commercial than tax reasons. The good thing is that they now are prepared to set the level of reserves and premiums appropriate to that captive, regardless of what the tax situation will be at the end, he added.
Clive James, director in charge of captive administration at Alexander Insurance Managers (Guernsey) Ltd., said that while his company has not lost any captives because of the CFC legislation, the law will force U.K. parents to examine more closely their motives for setting up a captive.
"If the captive is there as a cost-control factor, then CFC is not that critical. If it's there as a profit center then, yes, you have to look hard at the way the company is structured, at its activities," he explained.
As hoped, South Africa is proving a fruitful source for new captives. Helped by a positive response to Mr. Butterworth's trip there in February, Guernsey added four more South African captives in 1996, which, with two more captives formed this year, take the current South African total to 12.
Guernsey's success with South African captives is shared to a lesser extent by other domiciles. The domiciles are benefiting from a relaxation of that country's foreign-exchange laws, which have allowed the release of pent-up demand for captive facilities.
One South African captive formed here last year was Home Finance Guarantee (Insurance) Ltd., whose parent, Home Loan Guarantee Co., provides guarantees to mortgage lenders.
The purpose of the captive is to increase the parent's capacity to assist local lenders and support the South African government's target of building a million low-cost homes over the next decade.
Mr. Wild of IRM, which manages the new captive, said he believes his company's success in securing the business is a result of the expertise it has built up managing mortgage guaranty captives for U.K. parents.
Mr. Butterworth said he was not at liberty to discuss Guernsey's new
U.S.-parented captives or details of those captives that had transferred from the Isle of Man or Bermuda.
However, Swiss engineering company ABB Asea Brown Boveri confirmed it transferred a captive to Guernsey from Dublin and formed another Guernsey captive.
It set up ABB Power Insurance Ltd. to provide property coverage for gas and turbine facilities, and it transferred ABB Reinsurance Co. Ltd. to the domicile. Chris Noon, ABB's general representative in Guernsey, said: "In coming to this decision, ABB considered a number of factors and selected Guernsey because it is the European center for captive operations and combines this with an excellent regulatory environment."
Guernsey is confident that two legislative changes, one enacted earlier this year and another due this summer, also will begin bringing in more business this year.
At the end of January, Guernsey's Protected Cell Companies Ordinance, 1997 became effective (see story, page 44). A PCC is a new type of company intended to be a practical alternative to standalone captives and to offer more protection to participants than the traditional rent-a-captive, with which it is has similarities.
Participants in a PCC insurance company contribute to the capital of the company, but their insurance assets and liabilities are treated as individual companies or "cells" doing business with the core company.
Mr. Butterworth said prospective users from a wide variety of sources have "enormous" interest in the concept. However, it is taking a long time to establish the first one, because a PCC formation requires multiple participants. Mr. Butterworth expects the first applications for PCCs this month.
Views among captive managers are more varied.
IRM's Mr. Wild said he expects PCCs to have a slow start. "I think people are still looking to find how they can best be used.*.*.for the right niche," he said.
However, he acknowledged that the concept is likely to prove more popular with broker-owned captive managers, which would have a bigger pool of potential clients to group together into a PCC.
"For the likes of us as an independent, we would have to go out and find a number of small to medium-sized companies who have a sort of common aim and purpose, get them to agree with one another and then form a company. That is notoriously difficult," he noted.
However, he agreed that it is beneficial to have the PCC legislation as "another tool that we can use" to attract captive business to Guernsey.
Malcolm Cutts-Watson, managing director of one of those broker-owned captive managers, Willis Corroon Management (Guernsey) Ltd., thinks the PCC law is "quite an exciting piece of legislation." It already has enabled his company, which manages 41 active captives in Guernsey, to attract a couple of new clients in anticipation of them participating in PCCs.
He expects all the various PCCs, once established, to be very different from one another. "There's no standard template," he said.
Mr. James at Alexander Insurance Managers also emphasized that PCCs are a new concept and thus likely to need time to be understood and accepted. He said some questions still need to be answered, such as the tax treatment of the cells and clarification of how their legal status will be interpreted.
On the positive side, Mr. James said startup and running costs should be "considerably" lower than for individual captives, and Alexander Insurance Managers has had a number of inquiries.
One company already in Guernsey that is keenly looking at the PCC option is Polygon Insurance Co., which is owned by five airlines and provides insurance for about 35 others.
Because the PCC is a combined placement structure, "It's ideal for a big captive, which is Polygon," said Richard Tee, Polygon's director and general manager.
"It's a structure we're considering for the non-aviation risks, where we are handling risks for the different airlines and where we need different things for different airlines. We've already effectively followed a rent-a-captive approach for those accounts. We could actually turn that into a PCC structure. That's something we're actively considering," he said.
The other piece of legislation with which Guernsey hopes to attract new customers is its proposed migration law, which would make it easier for captives to transfer from other domiciles, mainly by eliminating the need for them to shut down and start fresh.
The enabling legislation for the change has been passed, and Mr. Butterworth hopes to have the law in place by June.
Despite Guernsey's success in attracting new business in 1996, Mr. Butterworth believes there could be some slowdown, or possibly even a contraction, in its captive and broker numbers by the end of this year.
He attributes this largely to two factors: the PCC legislation and the mergers in recent months of some of the world's major insurance brokers. These developments have so dominated attention of so many of the concerned parties that formations have been put on hold, he says.
Mr. Butterworth also said some of the domicile's existing captives are likely to combine into PCCs, thus reducing captive numbers.
The number of Guernsey's captive managers, 37 last year, also is likely to decrease as a result of Aon Group Inc.'s takeovers of Alexander & Alexander Services Inc. and Bain Hogg Group P.L.C., and the merger of Marsh & McLennan Cos. Inc. with Johnson & Higgins. This will mean a consolidation of their captive management operations.
Mr. James at Alexander Insurance Managers (Guernsey) said there will be a merger sometime later this year of his group with the local captive management operations of Aon and Bain Hogg. Together they will manage about 85 captives-about a quarter of all those in Guernsey.