Here we provide a checklist of regulations with which the insurers of high-net-worth individuals and their vehicles must comply if they want to do business in the Bailiwick of Guernsey.

Insurance business in Guernsey is categorised as either general or long-term business. Long-term business is generally life-related, including contracts of insurance on human life, longevity-based annuities, contracts to provide sums on marriage or birth, contracts linked to indices of property values, permanent health insurance, capital redemption contracts, pension fund management and credit life assurance. This is a general rather than exhaustive list. Generally speaking, long-term business also includes life-indexed derivatives and reinsurance for those types of risk.

Fitness and propriety

All controllers of licensed insurance companies in Guernsey must qualify under the criteria for their 'fitness and propriety' in Schedule 7 Insurance Business (Bailiwick of Guernsey) Law 2002, as amended. The GFSC vets all applicants who want to become owners of licensed insurers or directors of licensees. It does not conduct general searches on the lookout for bad controllers, though. In the case of licensed insurers which are 'orphaned' or controlled through a trust, the GFSC will consider the fit and proper criteria for the trustee as well as the ultimate promoter of the transaction/scheme. It also wants to identify the promoters of this-or-that special purpose vehicle structure.

Business applications and plans

Licensed insurance managers handle most applications for licenses on behalf of applicants. Consent takes less than 28 days on the whole. Every Guernsey licensee is generally required to appoint an independent director who is not an associated party or owner of the administrator or shareholder.

All licensees, including SPVs, are required to submit and maintain business plans which explain the rationale behind their businesses and their detailed financial structures (concerning liability, capital, risk gaps, premiums, reliance on reinsurance etc.). They must submit other business plans in connection with individual cells of PCCs or ICCs. Every licensee must also tell the regulator about any change it wants to make in the business it writes and wait for approval.

General representatives

All licensees, unless they are self-managed with appropriate levels of resource, must appoint a general representative which is an authorised insurance manager. This legally obliges the manager to (a) generally act on behalf of the insurer and accept service of documents on its behalf; (b) send documents about returns, deposit accounts, reports and other things to the GFSC; and (c) give the GFSC any other information that it wants.

Every baby should squeal

All entities and individuals resident in Guernsey are under an obligation to report suspicious activity representing potential money laundering to the police, all the way down to the youngest baby. This might appear to be a law straight out of Nazi Germany, which once occupied the island, but only people who work at financial and other regulated entities need fear reprisal for disobedience, as the general blanket obligation carries with it no penalty - just a criminal record.

Listing on the exchange

A number of examples of licensed insurers or SPVs have listed their shares or notes on the Channel Islands Stock Exchange and other exchanges. The listing of securities does not require any separate consent from the GFSC but ought to be mentioned in the insurer's business plan. The UK and US 'recognise' the CISE and securities may therefore count as qualifying investments with a wider range of capital providers (for example pension funds) than would be the case for private, unlisted notes. Each applicant for listing must have a sponsor which is a member of the exchange.

Overlaps between investment and insurance regulations

The GFSC recognises that insurance SPVs usually involve single investors and bespoke peer-to-peer transactions which have little or no spread of underlying risk. This means, on the whole, that they cannot be construed as collective investment schemes under the applicable investment regulations. An SPV is also often structured as a platform sitting below an ILS fund or capital feeder structure. Much, however, depends on the nature of the SPV and its promoter, and the marketing and the width of circulation of marketing materials. The circulation of marketing materials for restricted investments (such as a shares and notes) is a regulated activity if carried out in or from within Guernsey to the public. In certain circumstances it is possible for an insurance SPV to fall within the remit of both insurance and investment regulations. Despite this worry, however, hybrids of investment funds and insurers/reinsurers are becoming more common. The GFSC is apparently very approachable on the subject of novel structures.

Banking arrangements

The GFSC does not dictate that collateral held in connection with insurance SPVs should be kept in Guernsey. It is very typical for SPVs to use a range of US and international banks, usually at the commercial option of the reinsured. The GFSC does, however, expect such banking institutions to have an appropriately high level of credit rating to guard against counterparty risk.

Accounting and IFRS 103

Guernsey companies do not have to issue audited accounts to any public registry. Accounts of all licensees do have to be submitted annually to the GFSC to ensure prudential oversight. The GFSC has waived the old requirement for accounts to comply fully with International Financial Reporting Standards (and in respect of 103 in particular), probably resulting in considerable savings for SPVs. That said, the world is moving towards a common financial language, which is good for HNW investors and trustees: the international spread of IFRS makes it easier for them to compare investment cases in different markets.

Actuaries

Actuaries must be appointed in connection with all licensees conducting long term business and licensees must follow certain rules associated with the separation of the assets of such business. The GFSC has an absolute discretion to permit a long-term insurer not to appoint an actuary. This can apply to certain types of long-term SPV where there is securitisation or reinsurance of long-term or longevity-related risks but where the risk is unlikely to alter significantly after the inception of the structure (for example run-off situations or the reinsurance of pension scheme longevity risk). This can help to slash the long-term costs of certain types of SPV.

Here and there

As we have seen, Guernsey's AML laws are, if anything, more stringent than those on the mainland. Guernsey has decided not to apply a Solvency II equivalent capital and solvency regime as its insurance and reinsurance market does not include any systemically material general insurers with European-centric operations. It also has a 'dual regime' as regards the European Union's Alternative Investment Fund Managers Directive, which has been covered in these web-pages many times before.