An Innovative Tool
Guernsey remains the leading centre of choice for captive managers in Europe and many in the industry are keenly aware of the need to remain innovative. One area where innovation is proving successful is through the capabilities of the banking institutions that support captive managers. In Guernsey, the Royal Bank of Scotland International (RBSI) is a leading provider of banking services to the island's captive market and continues to invest in innovative solutions to improve cash management and liquidity in the market. An aspect of the industry where the bank believes there is scope to enhance the service to captive managers is in the provision of letters of credit (LoC), the facility used by the captive industry to meet its obligations to underwriters or reinsurers. In some circumstances, LoCs are regarded as inflexible and costly, particularly in cases where there is a need to renew or change a policy.
Industry first
Aware of this, RBSI's corporate insurance team in Guernsey designed and launched the first security trustee arrangement (STA). The facility is a ground-breaking insurance product, designed to allow captive insurance companies to meet underwriting and reinsurance obligations in a more flexible way. Chief among its advantages are that it does not require the captive to liquidate a proportion of its portfolio of assets to provide security, nor does it require a new LOC for each policy renewal. The STA is also extremely flexible, allowing an increase or decrease in the collateralised assets as agreed by the captive and the secured party throughout the underwriting year. It has proved to be a cost-effective alternative, particularly because it is so much more flexible than the traditional approach through LoCs. In a typical example, if the group serviced by the captive manager acquires a new company, it is likely they will have insurance requirements, so the captive manager would need to re-assess the insurance programme with the likelihood that a new or amended LOC would be required. With an STA, a mechanism is in place, signed by all parties, which allows for a set procedure when amendments are required. As a result, the amendment to the insurance programme can be achieved in days, or even hours in some cases. It is accepted that this move away from relying on LoCs is quite a departure for the industry and we expect it will take time for the facility to be embraced by all the major participants in the captive insurance industry. But the innovative and flexible nature of the STA option has been recognised by many already.
Crossing Over
In fact, only 12 months since its introduction, the new facility has been used by a number of clients and is proving a workable and practical tool for the captive manager. Several subsidiaries of FTSE companies are among those that have already switched from using LoCs. Shaun Brook, account director at captive manager Willis Management, described the STA as the perfect solution for its client allowing flexibility in its negotiations with fronting insurers and more effective management of the client's assets to maximise their returns. He described it as a cost-efficient and flexible alternative to traditional LoCs. During the past 12 months, RBSI and Willis Management have worked closely in tandem with the fronting insurer to ensure any claims under the STA have been paid in a timely fashion. The process is quick and can be completed in a number of days rather than the weeks and months seen when attempting to amend a traditional LOC. This benefits all parties by reduced staff time and the maximisation of the investment return in relation top the assets forming part of the underlying collateral. It has proved easy to amend the STA when adding or removing lines of insurance business in cases where the captive is either writing a new programme or closing down an existing one.
Across the board
The first product of its type available in Guernsey, the STA has helped to resolve some of the issues clients face when using LoCs. As it becomes more widely known within the market, RBSI believes it will transform this aspect of the captive business. Established as a robust alternative to the traditional LoC, it is now anticipated that its use will become more extensive as more captive boards consider the STA at the annual renewal of their insurance programmes. It is already the case that the majority of large fronting insurers are indicating their interest in the use of this facility in the right circumstances and we are talking to other firms in this sector. What about the future use of the facility? It is expected the STA will have other applications in addition to underwriting and re-insurance. We have already received a number of enquiries as to how the product might be used to support a number of enquiries as to how the product might be used to support a negotiated agreement between two parties, particularly where a portfolio of assets is being used to support different obligations, so we are currently considering the possibilities of how we can develop the product to support different lines of business. For the time being, however, we can point to the positive response that the new facility has enjoyed from many captive managers. In such a competitive environment, it is important we can continue to provide innovative facilities and enhancements of this nature. Only by a willingness to invest and to respond proactively to the changing needs of the client, will the island and its providers maintain their leading position against increasing competition from other European centres.
