Why Guernsey was right not to seek equivalence

Guernsey recently made it quite clear it would not be seeking equivalence under Solvency II. Dominic Wheatley examines why the authorities there felt the need to make this declaration and what it means for insurers and captives there.

The authorities in Guernsey have announced they have no plans to seek equivalence under Solvency II. The joint announcement was issued by States of Guernsey Commerce & Employment Department and the Guernsey Financial Services Commission in January. It is straightforward and unambiguous but does nevertheless raise some questions.

Why was such an announcement necessary? After all not many authorities feel the need to issue statements of what they are not going to do. Other jurisdictions have not felt the need to make similar statements - aside obviously from those who do have plans to seek equivalence.

Ambiguous statements
The need arose out of previously ambiguous statements made in public addresses and in press articles in which GFSC executives implied a proactive interest in pursuing equivalence. This gave rise to press speculation and created uncertainty as to Guernsey's intentions. Clearly, owners of Guernsey insurance companies, both actual and prospective, need to know what the regulatory environment will be at least for the medium term. Uncertainty on such a key matter was hampering proper planning and stunting the development of the industry. Clarification of Guernsey's position was certainly needed.

So why is this the right decision for Guernsey? The Guernsey International Insurance Association has long argued against equivalence for a number of reasons. Solvency II is designed to deal with systemic and group risks, risks not generally faced by Guernsey-based international insurance companies. Guernsey regulation is already robust and effective - insurance failures have been rarer there than all major economies and most other independent financial centres.Equivalence would burden Guernsey insurers with unnecessary costs and render currently effective captive business plans uneconomic. There are no identifiable benefits of equivalence and existing business plans will remain effective under Solvency II, even those involving European risks. There are no significant new sources of business that will be attracted to the island by equivalence - indeed the opposite may prove to be the case.

Rigorous review
Guernsey has worked hard over the last 25 years since the enactment of its first insurance law to establish an extremely effective regulatory framework designed to respond to the demands of its business. This was rigorously reviewed by the International Monetary Fund last year and given a clean bill of health as compliant with acceptable international standards as determined by the International Association of Insurance Supervisors.

This has not happened by accident. As a founder member of the IAIS, Guernsey has always sought to adopt IAIS core principles within its regulatory regime However, it has done so intelligently, applying those principles carefully to meet the specific risk profile of the business being regulated and minimising the burden of unnecessary regulation applicable to meet risks not present within the local industry. Solvency II is highly prescriptive and, as currently drafted, does not respond to the particular regulatory challenges of the niche companies and limited business plans typical of Guernsey captives.

Strong boards
It should be noted that for the small number of companies for which Solvency II would provide an effective basis of regulation, there is no impediment to adopting those standards unilaterally - something that a number of them are considering or even actively pursuing. This might seem strange until one looks at the strong corporate governance culture in the industry. Strong boards will always look to adopt appropriate best practice even where not obliged to do so. That is just good business sense.

What are all the other points in the statement about? These are a reiteration of Guernsey's commitment to international acceptable standards and a confirmation that there will be no change to the stated policy without the agreement of the political and regulatory authorities and the local international insurance industry. This is important in satisfying Guernsey captive owners that this announcement secures Guernsey's position for the foreseeable future, enabling them to plan with confidence for the medium term. It further reassures them that they will be fully consulted before any plans could be made towards equivalence in the future.

Surprising involvement
Some people have expressed surprise at the involvement of C&E in what might appear to be a regulatory matter. However, the consideration of equivalence is far from being a straightforward regulatory decision. For a small independent finance centres such as Guernsey equivalence will involve the ceding of control of significant aspects of their regulatory regime to the EU and fundamentally affect their relationship with Europe.

In addition it is a substantive economic decision given the importance of the finance sector generally and the international insurance sector in particular to Guernsey's economy. Clearly it would be inappropriate in a democracy for matters of international relations and economic significance to be left to the independent regulatory authority. Such decisions require proper democratic accountability at the political level.

Difference stance
Some domiciles are adopting a different stance and two established captive domiciles are in the so-called first wave of equivalence applications: Bermuda and Switzerland. However, both are doing so primarily to protect their international commercial reinsurance industries, not for their captives. In each case they may be looking to mitigate the effect of additional regulatory burden involved through the exclusion of captives specifically or the application of so-called proportionality principles that the European Captive Insurance and Reinsurance Owners Association and others are looking to have included within Solvency II. The progress of all of this debate will be followed with great interest.

Business as usual
Guernsey, however, can get on with business secure in the knowledge that the regulatory environment is stable for the time being. This is in some contrast to those jurisdictions actively considering equivalence, the impact of which on their resident captives is very uncertain and potentially detrimental. It also raises questions about the position of those jurisdictions that have yet to clarify their intentions at all: on what basis can one assume that they are not going to pursue equivalence.

Now that Guernsey has affirmed its position on S2 equivalence, other domiciles will be under pressure to state theirs.

Dominic Wheatley is the immediate past chairman of the Guernsey International Insurance Association and managing director of Willis Management (Guernsey)

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