- Managing Director of the Guernsey Aon Business
“There are challenges in numerous areas, for example, the challenge of finding yield in the current investment environment which insurers traditionally relied on to help them pay claims.”
Paul is the MD of the Guernsey Aon Business. Previously, he was MD of Aon in Gibraltar and Malta. Paul is also the chairperson of the Guernsey International Insurance Association.
What impact do you consider Solvency II will have on the captive insurance industry?
It depends on location – whether you are on or offshore. For onshore EC captives, it will mean extra compliance to be dealt with, plus the additional workload would make smarter technology solutions imperative. The administration time alone would increase by 100-300%. While Bermuda has applied for third country equivalence and is currently talking about a twin-track approach, in Guernsey we have no plans currently to apply for equivalence, instead basing our approach around modern risk-based regulation in accordance with the International Association of Insurance Supervisors (IAIS) 2011 rules. Further simplification needs to come from the EU parliament if Solvency II is to be fit for purpose for captive insurance companies. It’s important to remember that captives are about self-insurance, cost-effectiveness and prudence – they aren’t global commercial insurance companies. To be treated as such would be totally disconnected to what captive insurance is. So we’re very interested to see what will happen to captives under Solvency II. Guernsey’s position is that it is in the best interests of captives to remain outside of Solvency II as it stands.
Do you consider the challenge of cost versus return to be a significant issue?
It’s certainly a driver in the decision process to apply for equivalency. There are challenges in numerous areas, for example, the challenge of finding yield in the current investment environment which insurers traditionally relied on to help them pay claims. Today’s environment is also more competitive for managers. Fees are flat, unless the captive changes managers, and there has been some push back in terms of auditing. Contrary to the traditional approach of captives inheriting the parent’s auditors, now parents are more cost-conscious, making them willing to consider new auditors. However, captives in general continue to be conservative with their investment strategies, although there is a trend for seeking more efficient investment vehicles. There is increased loanbacks of capital to parents, with more pressure for making dividend payments back, too. In terms of Letter of Credit (LOC) costs, Barclays remains the market leader, but there is now greater market acceptance of Security Interest Agreement and Trust arrangements too, which shows some innovation in that area. The difference in cost between LOC and both SIA or STA arrangements can run into thousands of pounds.
Are parents being more demanding of captive managers?
I would say that we put ourselves under pressure more than parents do. Being recognised as thought leaders is one of our core values, alongside superb client service, operational excellence and talent development. Recent innovations have centred on Employee Benefits, Cyber-related and Environmental risks, and recognising that these are areas of real focus for our clients. The evidence of our success can be seen in our relationship with our captive parent – if they’re not feeling valued, they’ll look elsewhere. We haven’t been in many competitive situations and have a high retention rate. Retendering of service providers is common perhaps every three to five years, but not always involving captive management. We constantly strive to introduce new services and innovations – such as Aonline and Risk Maturity Index – and I like to think we have satisfied clients. For example, about 60-70% of our clients use us as both their captive manager and broker, which has risen from a 50-50 split a few years ago. Plus, we’re still very much using Barclays. While the parent’s treasury is involved in loanbacks to parents, it’s the excellent local service from your banking partner that dominates. We’ve grown to expect Barclays to find our clients the best available rates. We’ve enjoyed a relationship with Barclays for over 10 years, and they have significantly strengthened their captive team in Guernsey and Jersey, with a strong presence in the Isle of Man too.
How much redomiciliation are you seeing, with captives looking to move due to regulatory chances or for regulatory arbitrage?
There isn’t much movement at all in Europe and certainly not for arbitrage in Guernsey. What we are seeing is a tremendous rate of cells increasing, which continues to be beneficial for Guernsey and suggests that SMEs are keen on self-insurance solutions, but cells offer greater versatility beyond traditional captive solutions. There is a growing Insurance Linked Securitisation (ILS) business here, with investors seeking to offer reinsurance protection driven by the insurance market’s provision of attractive returns for investors. Guernsey is certainly a growth area, with a high rate of business preferring Guernsey or even transferring from Bermuda. Indeed, Guernsey is expanding beyond simply captive insurance. Its reputation as a captive insurance industry is starting to change to the extent that it’s becoming more of an insurance market for ILS, kidnap and ransom, and fine arts. The profile of jurisdiction is changing and we’re starting to emulate an early stage Bermuda.
What would you look for from Barclays in terms of more innovation?
The profile that the board of directors seek is more focused on service and security, plus competitive rates and liquidity, rather than innovations as such. Security is fundamental. Internet banking and the speed to market are also key, and there’s a great emphasis on a KYC (Know Your Clients) approach. Everyone gets frustrated by the paperwork and bureaucracy that goes into setting up an account, so helping us react and serve customers with the utmost efficiency is what we look for. Throughout our relationship, Barclays has been a fantastic partner.