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Welcome to the Guernsey Finance podcast page.
Our podcasts bring you all the latest news and insight from Guernsey, the global finance specialist, as well as audio from some of our online events.
brandon 0:05
Hello and welcome to the We Are Guernsey podcast where we bring you interviews with leaders from global financial services as well as news and developments from guernseys financial services sector. My name is Brandon Ashplant and I am Senior Strategy and Technical Executive here at We Are Guernsey. For those not familiar with Guernsey, the island is a leading global finance centre. The success of the industry here is underpinned by economic substance political stability, and asset security committed to the cause of sustainable finance. Guernsey is this year celebrating the centenary of the first captive being launched on the island. And we are very pleased to be welcoming Ben Davies, Senior Underwriter and Client Manager at Willis Towers Watson onto the podcast today. In this episode, we'll be exploring the uses of captives and guernseys position in the marketplace, both historically and looking forward to the future. So without further ado, welcome, Ben.
Ben 1:03
Hi there, thank you very much.
brandon 1:05
So, perhaps, you know, we begin with some introductions, you know, can you tell us a bit about yourself and how you ended up at Willis?
Ben 1:13
Sure. I started in insurance, back in 2005, working in the UK, for an insurance broker, and then moved on and worked for an insurer, andnd then for a mutual insurance company. So it's been really interesting not only to do those three roles within the UK, but now move across to Guernsey and dip dip my toe into captive insurance. I've been absolutely loving it. It's a fascinating part of the industry, and one that I fully intend to, to stick with for the foreseeable future. Interesting.
brandon 1:58
So, you know, often people in the in the world of financial services have heard the term captive, they vaguely might know what it kind of is. But just to kind of pin things down a bit for the listeners, you know, when we say captive insurance, you know, what do we actually mean?
Unknown Speaker 2:15
I mean, I'll try and put this as as simply as I can, because it it is, in fact, quite quite a straightforward concept. But an organisation or business would usually purchase their commercial insurance cover from an insurance company. A very similar process, Brandon, to the way that you and I would purchase a car insurance, but captive insurance is slightly different in that instead of purchasing insurance from a commercial insurance company, a, it will start up its very own insurance business, and it will purchase insurance in that way. Essentially, a captive insurer would behave just like a commercial insurer, it will provide insurance cover, it will issue policies, it will charge a premium and pay claims, yet its function traditionally, as I mentioned, is only to ensure the risks of its parent company.
brandon 3:22
Okay, and where did the industry kind of come from because it's kind of I mean, it's it's kind of like other things we see out in the market, if you like in the wider kind of world of financial services, but it is also quite niche in the sense of it's to a degree ring fenced and that sort of thing. So how did it kind of emerge? Where does it kind of come from?
Unknown Speaker 3:39
um, I mean, that the the very first registered captive insurance company in the world, was registered here on the island of Guernsey in 1922. It was a multinational food group called Vesteys, who set up its own insurance company and they called that company, Commercial Insurance Corporation Limited. Initially, they used this this captive insurance company to provide insurance cover for their commercial property assets. And commercial Insurance Corporation Limited ended up running for over 80 years, covering a wide variety of Vesteys risks during during that period. To be honest, capsules don't normally run for that long, but that was a really, they had a very long lifecycle, but they're not always running for for 80 years. Remarkably, the the aim and the purpose of setting up a captive insurance company. It hasn't really changed Brandon since since 1922. I know that that that seems strange to say, but the actual primary purpose of setting up a, an insurance company like this really hasn't changed at all. And the reason to start up a captive company, it can vary depending on what benefits the parent company is looking to gain from the whole process. The parent company might want to access the reinsurance market, or they may wish to have more control over their risk management and claims, they may wish to reduce the overall total cost of their risk. And it it really does vary what you want out of it. But the capture company will provide all of those things and more. But it's, I think, it's never for short term game, it's definitely a company who starts up their own insurance company is in it for the long haul, whether or not it will last for 80 years is another matter. But I think the actual purpose of of setting up a captive will vary depending on on what you want to get out of it.
brandon 6:15
Yeah. And you sort of touched on some of the benefits there already been there. I mean, if I, you know, if there's a firm out there, and, and looking at how to kind of best structure their kind of insurance in many ways. And I was like you say there's there's cost benefits to captives. And obviously, there's the ability to enter the reinsurance marketplace. But is there kind of an it, you know, across sectors, if you'd like, and, of course, kind of industries, when it comes to setting up captives? Is there kind of an obvious benefit over kind of traditional methods of insurance? Or is it really just nuanced?
Unknown Speaker 6:49
I think it's it's nuanced. To a certain degree, there are more general advantages and benefits from starting up your own your own captive. I mean, one way to differentiate between the benefits is separating them into strategic benefits and financial benefits. And an example of the strategic benefits could be that you will be able to centralise your risk management function, either all of your risk management function or part of it, which in turn will provide a more effective control, which in turn should have a positive effect on the frequency and severity of your claims. Potentially, you may have lots of different facilities either spread over a country or over the whole world, which are allocated to different cost centres. So you can actually allocate costs more efficiently across your, your various cost centers, you can smooth out fluctuations in the insurance market, I suppose this one you could say is both a strategic and financial benefit. But if insurance cover is either too expensive to purchase, or it might be written on a very restricted basis, or in some circumstances completely unobtainable, then that's where a captive can fill in these gaps, and tailor the cover that it provides for what are sometimes very, very unique risks. Another financial benefit would be that the captive can achieve cost savings through the accumulation of its risks. Because they are managed just through one captive entity, whereas previously, you might have lots of different facilities, managing the risk by using a captive, you really are focusing that risk management just on on one central office. And a captive insurer can be very, very useful in the event, as I mentioned just a moment ago, in the event that there are unusual or unique risks for a business to cover. I've mentioned whether it might not be economically viable or possible to purchase an insurance but through a captive company, you are able to cover those risks.
brandon 9:36
Yeah, and and you know, if it was we're kind of playing it in layman's terms in many respects, when we say that a firm is going to kind of set up its own captive and and they're going to going to operate their insurance model in that kind of way. What what kind of role do you play in that process? When do you kind of step in and what what kind of what kind of advice do you typically kind of provide?
Unknown Speaker 10:01
I mean, my, my role here at Willis Towers Watson is is split into two really, not only am I a Client Manager, where I would look after the day to day running of the captive clients that I am allocated, but I'm also looking after the new business side of things here as well. We're at a time where there's a lot going on externally, and within the insurance market itself, which means that not only is it very exciting time to be part of captive new business, but it's also a very, very busy, very busy time, which which can only be a good thing.
brandon 10:46
Right, good news. And you know, what kind of companies and industries would you say typically come to you looking to kind of establish a captive and and operate their insurance in this kind of way? Is there kind of typically industries that kind of steer clear from it? Or, you know, is it entertainment? sort of cool things? Is it what what kind of stuff do you typically see?
Unknown Speaker 11:08
I mean, I wouldn't have said there were there was any sets criteria for either a trade or a type of company that wanted to set up their own captive, essentially, in in Guernsey, and as part of the, the GFSC framework, all insurance companies, whether captives or or commercial insurance companies, they have certain solvency requirements which they have to meet. So, essentially, the criteria is really stipulated by the regulator, whereby if you meet the solvency requirements as a set out, then you are able to go through the process and open up your own insurance company or own your own captive business. So, that's really the only stipulation. Of course, captive insurance and the starting up your own captive lends itself naturally to larger companies, those with strong balance sheets and available capital to invest in a project like this, because of the costs involved with running your own insurance company, but technically speaking, as long as you are meeting the regulator's stipulations for setting up a cap to do in Guernsey then it could be any business in any trade, really.
brandon 12:40
So it's pretty, pretty open. Really.
Ben 12:42
Absolutely, absolutely . And I think some risk managers are actually quite shocked to, to actually find out about the actual costs of setting up a captive the criteria and the actual thresholds that they would have to meet. I think that they are often very, very surprised that these are actually a lot lower than they than they initially thought.
brandon 13:04
Really? That's interesting. I mean, you know, we're kind of the biggest advocates of Guernsey, as you, as you will know. And Guernsey I mean, I think it's probably fair to say that I think research that we've even conducted internally, but also stuff we see coming out of the local regulator, the GFSC. And the Guernsey Financial Services Commission is that, you know, Guernsey now holds roughly, I think it's a third of European kind of the captive market ratio, if you like, that's a huge chunk of business, and clearly we're doing something right. What makes Guernsey such an attractive place to administrate these kind of structures.
Unknown Speaker 13:43
I mean, Guernsey has, has always had a very, very strong infrastructure. It's, it's always had talent on the island to actually staff, captive captive managers. But probably more important than than both of those are that Guernsey has always been innovative. That's, that's really the key. The key aspect. Guernsey has always looked for innovation, and I think in combination with its geographical proximity to London, which has always been acknowledged as the primary insurance location in the world. Guernsey as a domicile has a unique combination of attributes, which I think is why it's been Europe's number one captured domicile for so long. I mean, having said that, the local insurance industry, as well as you guys at We Are Guernsey. We refuse to sit on our laurels and are constantly striving for further innovations. And those unique solution driven offerings to provide to our, to our global client base. I think, at this point, it's probably, I'd like to give a special mention to the regulator gfsc. Because not only do they provide a very, very robust framework in which for captives to operate, that framework is also quite flexible. And it's a very responsive regulatory regime, which is, I think, a lot quicker, and definitely less, less prescriptive than solvency two or equivalent regimes. And I think it's this kind of governance and framework that ensures the island remains an attractive proposition for any firm looking to set up a captive insurance company.
brandon 15:54
But so so yeah, we, you know, we mentioned earlier, and we've touched on it sort of earlier in the podcast, but, you know, guns this year, marking 100 years of the first kind of captive being set up on the island. And could you tell us a bit about the significance of this to your industry in your sector locally?
Ben 16:11
Sure. I mean, it's, it's hugely significant. To the captive industry. It's something that we're incredibly, incredibly proud of, you know, centenary anniversary is always something to be celebrated, regardless of what it is. But especially when we consider that captive insurance has been at the forefront of local financial services for such an extended period of time. Each sector of guernseys finance industry has its own individual attributes, and the captive industry is no different. But its unique selling point has always been its innovation. Ever since the inception of captives way back in 1922, when bestes group started up the world's first captive insurance company, this pioneering mentality has continued throughout the years, with innovation after innovation, after innovation, just a very briefly touch on a few of these. In 1997, we had the protected solar company, first developed on the island of Guernsey, and celebrating its 25th anniversary this year, something which has been duplicated and copied and used in financial centers across the world. In 2007, the first insurance linked securities transaction was performed again, here on the island of Guernsey, and more recently, only last year, the Guernsey international Insurance Association developed the world's first environmental, social and governance framework, which included a kite mark upon accreditation for its insurance members.
brandon 18:04
Okay, and just to change the color conversation a little bit here, and, and focus to perhaps events around the world. Some more, you know, we've been through a turbulent for a few years. And, you know, it goes without saying that the COVID pandemic, and recently the conflict in Ukraine as well. And actually, more recently, the inflationary concerns on a global kind of macro economic environment. How has these affected the captive insurance industry?
Unknown Speaker 18:37
I mean, that's it's a very good question. And it's a very interesting question, Brandon. It's, I think the answer is, is could take a while or something, it probably deserves a much longer answer than I'm able to provide during this podcast. I'll try and keep it as as succinct as possible. The cyclical nature of financial markets in general, and specifically insurance markets, are, by their very nature, an essential part of how and why we use risk transfer mechanisms in the first place. And the dramatic world events which you which you mentioned, just now have naturally had a significant effect on the traditional insurance market. To which to a certain extent, captive insurance has been shielded from from this from the effects of this, but it's during these times of uncertainty and turmoil, that the benefits of owning a captive company are actually most apparent. And it's the reason why Guernsey has seen and continues to see a high number of new business inquiries in respect to setting up new captive companies. It's because of these challenging market conditions that We're seeing this push for new business. The traditional commercial insurance market suffers from from these events that you just mentioned. And its reaction to these events is to stifle growth, and essentially to protect what it has, whether that's through increasing their premiums, placing restrictive terms onto policies, and, and in extreme cases, completely shutting up shop, captive, on the other hand, will always be open for business. And we'll look to fill in those gaps, where the commercial market is either not able to, or is only be able to provide cover on very restricted basis. So it's really during these challenging years that we see captives thrive.
brandon 20:56
And for those who follow the market, or work in, in the captive insurance industry itself, you know, they'll know what the industry is experiencing, and what we mean when we say sort of hard market. But for those who don't know, you know, could you explain to us what is meant by the term hard market and what that kind of means in the captive insurance industry?
Unknown Speaker 21:16
Yes, the characteristics of a hard market is that capacity for insurers to write certain risks decreases, and in turn similar to any supply and demand model, insurance premiums will increase. This is as opposed to a soft market, where insurers are increasing their market share by offering cheaper rates, attractive policy wordings, and reduced excesses. And as the underwriting standards, relax during a soft market, inevitably, over time, the result of this is increased claims in both frequency and severity. And when insurers find that there is insufficient premium to cover their losses, that's when a combination of that plus external market forces which we spoke about, such as the pandemic wars and high inflation, it shifts the market from soft to hard. I've mentioned the effects of hard market conditions. But it's important to mention that this also happens as a significant effect on captives, specifically, because this is when running your own insurance company brings the most amount of benefit. A captive doesn't have to mirror the high premiums or the increased excesses or the restrictive clauses, because a captive insurer is only considering the risk profile of its parent company. And this makes setting up a captive very, very attractive to organisations who do not wish to be adversely affected by the cyclical nature of the market. And this in turn brings consistency, predictability, in the majority of cases, profitability, all of which, when dealing with risk and insurance are vitally important.
brandon 23:10
Yeah. So it's a good time to get it get involved and get the get a captive set up, then in many respects.
Unknown Speaker 23:17
For sure, absolutely. Not only we have the have we seen the numbers of new business inquiries significantly increase. I think the future of captives is really, really bright.
brandon 23:33
And that kind of leads into our final question, Ben, you know, we've touched on the past and the present, and, how these kind of international events affect and have knock on impacts on the insurance industry in the wider kind of world and the approach by the private sector to relook at kind of the captive model and whether they should get involved or not. And where do you see the long term, maybe future of captives and how is Guernsey kind of best placed or not maybe to kind of service this, this marketplace?
Unknown Speaker 24:06
I mean, first of all, I think it's very, very well positioned. I think we're in a really, really good place at the moment. And although I've mentioned throughout this podcast, that any captive insurance company only insures the risk of its parent company. And I'm gonna go back on that slightly because, as the captive concept has developed and grown in, in combination with the flexibility provided by our local regulator, it's actually now allowing captive companies to write not only first party risks, but those of a third party. And this slightly different types of setup is referred to in the industry as affinity business. And we're really seeing this as as an important development within the local industry, and an area of segments significant growth. As I mentioned previously, I think Guernsey is very, very well placed to capture this growth of affinity business. And although it's a very new development, I see this as another very important chapter to add to Guernsey's innovative finance sector history. Aside from that, I think for a while now, Guernsey has been recognised as an international hub, for reinsurance and insurance linked securities, with special purpose insurers, used for catastrophe bonds, side cars and life based securitization. Guernsey continues to innovate with the introduction of the world's first mixed purpose PCC, ICC, which is both a licensed insurance company and a regulated fund. I think the other hot topic at the moment worth mentioning is sustainable finance. It's a priority for most organisations across the world, with topics such as weather, its biodiversity, the energy transition, as well as carbon offsetting. And no doubt many of these challenges that the corporate world are facing at the moment will be discussed next month at your We Are Guernsey Sustainable Finance Week. So I know, myself and a number of my colleagues are looking forward to attending that. And just a just on that topic, that the most suitable example of applying sustainable finance to alternative risk transfer is the first humanitarian catastrophe bond covering pure volcanic eruption, which was completed using a Guernsey insurance linked security structure. I think, probably my final point on the future of not only captives but of alternative risk transfer would be to mention pension longevity swaps, this type of arrangement. Essentially, it limits the exposure of a pension company in the event that its members live longer. We've seen significant swap deals here in Guernsey for very high profile companies, BT and Towers Watson, just to name two, and the expectation is for Guernsey success in this arena to continue for the foreseeable future. Okay,
brandon 27:43
well, that's, that's great. Thank you very much, Ben.
Ben 27:47
You're very welcome. Good to speak to you.
brandon 27:48
Good to speak to you. And thank you for making the time today and for explaining some of the history and the current usage of captives on the island. And for even just there at the end, kind of outlining the real range of achievements gains he's made in the sustainable finance space all the way through to the kind of innovations we've been, we've been pushing effectively for the last kind of 25 years. It's a real testament to the island and the industry's achievements. And thanks also to you for listening. If you enjoyed this discussion, we have a library of interviews and panel discussions on the We Are Guernsey podcast channel, you can check them out by searching for We Are Guernsey on your preferred podcast platform to find out more about Guernsey's success in sustainability as Ben mentioned, you can tune into our sister channel, the Guernsey Green Finance podcast to find out more about Guernsey and its captive offering head over to weareguernsey.com. But for now, thank you for listening and it's goodbye from Guernsey.
Transcribed by https://otter.ai