Detailed Comparison between Category 3 and Category 5 insurance companies in Guernsey

Category 3 and Category 5 insurance companies in Guernsey

For the purposes of the Insurance Business Rules in Guernsey, insurance companies fall into 6 different categories. This document provides a comprehensive analysis of the differences between 2 of these categories:

Category 3 - Commercial General Insurers - a general insurer with any element of unrelated party business;

Category 5 - Captive (Re)Insurers - established and owned by companies to insure their own risks, rather than purchasing insurance from a third-party.

It explores the implications of these differences for insurers, policyholders and regulators. The analysis includes a detailed comparison of the following key areas:

Capital requirements
Regulatory compliance
Risk management practices
Financial security
Transparency

Supervisory focus
Market stability

By examining these factors, this document aims to offer valuable insights into the operational and financial dynamics of Category 3 and Category 5 insurers, highlighting the balance between robust financial standards and regulatory flexibility and also suggests ways how BDO can assist insurers and their boards achieve regulatory compliance.

For Insurers

Capital Requirements:
- Category 3 insurers face higher capital requirements and stricter capital adequacy rules, which can lead to higher operational costs but also provide a stronger financial buffer against risks.
- Category 5 insurers benefit from lower and more flexible capital requirements, reducing their financial burden but potentially increasing their vulnerability to financial stress.
Regulatory Compliance:
- Category 3 insurers must adhere to comprehensive regulatory requirements, including detailed annual returns and public disclosure obligations. This ensures greater transparency and accountability but can potentially increase administrative workload and costs. When using an Insurance Manager the Board of a Retail General Insurer (“RGI”) should undertake a gap analysis between the Manager’s resources, skills and knowledge and the regulatory requirements of a RGI. BDO have produced some helpful guidance on the changes in the Guernsey Insurance Business Rules in 2024. Comment on the Feedback Paper following consultation on the Rules for Retail General Insurers - BDO
- Category 5 insurers enjoy simplified regulatory requirements, which reduce their compliance costs and administrative burden, allowing them to focus more on their core business activities and the related party that is insured.
Risk Management:
- Category 3 insurers are required to implement comprehensive risk management practices, including stress testing and maintaining a risk register. This enhances their ability to manage and mitigate risks but requires significant resources and expertise.
- Category 5 insurers have more limited risk management requirements, reflecting their focus on related party business. This can lead to cost savings but may also result in less rigorous risk oversight by the Board.

For Policyholders

Financial Security:
- Category 3 insurers, with their higher capital requirements and stringent regulatory oversight, generally offer greater financial security to policyholders and other stakeholders. This can be particularly important for retail policyholders who rely on the insurer's ability to pay claims.
- Category 5 insurers, while potentially less financially robust tend to be part of a large corporate group which can provide additional financial support and stability.
Transparency:
- Category 3 insurers' public disclosure requirements ensure that policyholders and other stakeholders have access to detailed information about the insurer's financial health and operations. This promotes trust and informed decision-making for existing and potential policyholders and other stakeholders when selecting the insurer.
- Category 5 insurers are not subject to the same level of public disclosure and could result in reduced information being available to policyholders and other stakeholders.

For Regulators

Supervisory Focus:
- Regulators must allocate more resources to supervise Category 3 insurers due to their more complex operations and higher risk profile. This includes monitoring compliance with detailed regulatory requirements and conducting thorough risk assessments.
- Category 5 insurers require less intensive supervision, allowing regulators to focus their efforts on higher-risk entities while still ensuring that captive insurers operate within a safe and sound framework.
Market Stability:
- The stringent requirements for Category 3 insurers contribute to overall market stability by ensuring that these insurers are well-capitalised and effectively manage their risks.
- The simplified requirements for Category 5 insurers support the growth and sustainability of the captive insurance market, which can enhance the diversity and resilience of the broader insurance sector in Guernsey.

How can BDO support?

Financial Statements and Annual Returns: Assist in preparing detailed financial statements and annual returns, ensuring that policyholders and other stakeholders have access to accurate and comprehensive information about the company's financial health and operations.
Regulatory Compliance: Help navigate complex regulatory landscapes by providing expertise on compliance requirements, ensuring that the company meets all legal and regulatory obligations, including the public disclosure requirements.
Risk Management: Assist in developing and implementing comprehensive risk management frameworks, including stress testing and maintaining risk registers, to enhance the company's ability to manage and mitigate risks.
Internal Audit Function: Provide independent assurance to assess the design and effectiveness of your systems, processes and controls with a report highlighting how you can add value and improve efficiencies.
Capital Management: Offer guidance on capital adequacy and optimisation, helping insurers maintain the required capital levels while minimising operational costs.
Corporate Governance: Provide independent oversight and a check-and-balance function, ensuring that the insurance company operates transparently and ethically. Assist in the selection and training of board members on regulatory requirements, ensuring that the board has the necessary skills and knowledge to effectively oversee the company's operations.

Conclusion

Overall, the differences between Category 3 and Category 5 insurance companies reflect a balance between ensuring robust financial and operational standards for general insurers and providing a more flexible regulatory framework for captive insurers. This approach helps to maintain a stable and competitive insurance market in Guernsey.

How to get in touch

If you need further guidance on compliance with the insurance regulatory framework in Guernsey then please send your enquiry to advisory@bdo.gg or email your usual contact at BDO Guernsey.

Appendix A:

Aspect	Category 3 Insurance Companies	Category 5 Insurance Companies
Type of Insurer	Commercial General Insurers (unrelated party business)	Captive Insurers (related party business)
Minimum Paid up capital (Capital Floor)	£100,000 (£250,000 for retail insurers)	£100,000
Minimum Capital Requirement (MCR)	Must maintain minimum shareholders’ funds of at least 75% of the Capital Floor above	Generally lower, varies based on specific circumstances
Prescribed Capital Requirement (PCR)	Based on specific risks and business profile 99.5% confidence level	Simplified capital adequacy rules 90% confidence level
Own Risk and Solvency Assessment (ORSA)	Exemption if MCR <£1.5m Must be prepared by retail insurers	Exemption from preparing an ORSA if preparing an Own Solvency Capital Assessment (OSCA)
Regulatory Oversight	Comprehensive regulatory requirements, e.g. fronting arrangements, commission structures, loss reserve calculations	Simplified reporting and regulatory requirements
Annual Returns	Detailed Annual Return for retail insurers	Simplified Annual Return
Conduct of Business Rules	Applicable to retail insurers	N/A
Public Disclosure	Subject to public disclosure requirements if gross written premium>£500k or gross assets>£2.5m Compulsory for retail insurers	N/A
Financial Statements	Financial statements prepared under a recognised GAAP	May obtain derogation from some aspects of FRS103 if reporting under UK GAAP
Internal Audit Function	Required for retail insurers – must be performed every 3 years	N/A
Risk Management	Comprehensive – risk register, risk assessment, stress testing	Limited – risks of parent/group related company
Governance	Appendix 3 of GFSC Finance Sector Code of Corporate Governance 2 independent non-executive directors	Appendix 3 of GFSC Finance Sector Code of Corporate Governance 1 independent non-executive director
Regulatory fees (subject to change at GFSC’s discretion)	Application fee - £11,145 Annual fee - £11,145 Up to £17,500 for retail insurers	Application fee - £7,555 Annual fee - £7,555