Aon Guernsey · Insured out sourcing deafness / disease ... Chapter 6 – Trading finance profits...

Aon Limited is authorised and regulated by the Financial Services Authority in respect of insurance mediation activities only

Aon Guernsey Non-Executive Directors’ Christmas Seminar 12th December 2013

Charles Winter, COO & Head of Risk Financing Aon Global Risk Consulting UK

Agenda

Insurance Market Conditions & Forecast

Impact of UK CFC Changes for Captives

2 Aon Risk Solutions | Global Risk Consulting | Risk Finance

Insurance Market Conditions & Forecast


The Reinsurance Market – Opening Position

Reinsurer Capital It is estimated that $100bn of alternative capital will enter the market in the next 5 years ILS or catastrophe bonds - to lower the cost of underwriting capital supporting peak tail risks Sidecars to lower the cost of underwriting capital across the portfolio risk spectrum Formation of asset management divisions that will allow reinsurers the opportunity to accept

asset management mandates from investors


$410B

The Reinsurance Market – Performance

Reinsurer Performance


H1 Mixed half year results for insurers Nat Cat activity to date has been relatively benign Continued impact of low interest rate environment

Q3 European Insurers Sovereign and Political risk still major concerns but generally in good health going in to Q4. Rise in operating profits for many insurers compared with 2012, despite the some Nat Cat Swiss Re’s and Munich Re’s net income fell by 33% (due to low investment returns, European floods and

prior year claims deterioration)

US Insurers In Q1 reinsurance rates were stable with regional variation (in rates) across all classes of business. Although Sandy interfered with what was an improving rate climate overall, the US is more or less in a strong position for Q3. Market hardening is not expected

Market Conditions – as reported September 2013

Market Conditions – GRIP Insight

United Kingdom US

Property Update – Direct Market Commentary

Aon Risk Solutions | Global Risk Consulting | Risk Finance

The UK market generally remains highly competitive Different experience by occupancy (GRIP output for period April-Sept 2013)

All industries rates = -0.11% Food agriculture & beverage rates = -6.27% Manufacturing rates = -3.07% Retail and wholesale trades: +7.85%

Casualty Update


MoJ Portal for injury claims Claims Farming Insured out sourcing deafness / disease

Mesothelioma 3% levy GWP 2013 and 2014 Increase starting point for 2014

Zurich and QBE looking to rebalance EL / PL weighting

Global effects on liability claims over the last decade Increase in litigiousness Value of life and maintaining it Increasing inter connectivity Environmental awareness (emerging markets cyber)

No change in capacity levels

Significant differentiation in insurer responses based on:

Market Conditions – on the shop floor

Time, preparation and information = best results

Large companies remarketing = unique moment in time to leverage position

Market Conditions - Outlook 2013 renewal


Guy Carpenter: “Downward pressure on US Cat

Property Pricing is expected”

Lloyd’s (on Sandy): “Capital strength would not be

diminished and there would be no impact on its central fund of

reserves”

Council of Agents & Brokers: “Specifically, commercial

property/casualty pricing continued to gently creep upwards in the

second quarter. But no change in capacity levels”

AIG: “Prices will 'increase moderately’ as weak interest rates and new solvency rules are 'major factors’ driving re/insurance pricing.”

Munich Re: “We expect largely stable prices

across our portfolio”

Aon Benfield: “The January 1 renewal market for our clients will benefit materially from an excess of traditional reinsurance capacity and new alternative capital flows over light demand growth for reinsurance capacity. Therefore, our clients should expect to benefit from a competitive market even if a moderate hurricane season should develop”

Moody’s: US commercial P&C rates should continue increasing for the rest of 2013

Impact Of UK CFC Changes For Captives


Aon Limited is authorised and regulated by the Financial Services Authority in respect of insurance mediation activities only

The Context

Tax has always been raised in discussions of captives

Pre-1984 no CFC rules and deferral of full profits available

CFC rules put conditions round or limited deferral available

– Acceptable distribution 50% then 90% of profits to be distributed to avoid

assessment

– Exempt activities eventually required both un-related and non-UK premium

PCC cells historically a grey area as not companies

CFC Legislation – Captive Insurance Highlights

All profits out unless in (contrast the past) Entity based exemptions e.g. low profits / margin New concept “Charge Gateways” If above exemptions failed then test the Initial Charge Gateway

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Chapter 7 – Captive Insurance Businesses – underwriting and investment profits Cell captives subject to the new CFC rules Exempt EEA based captive with significant non-tax reasons Others apply such as: Chapter 4 – Significant people functions – where is insurance underwriting/assumption of risk? Chapter 5 – Non-trade finance profits – captive with excess capital up-streaming loans to UK

connected parties Chapter 6 – Trading finance profits – profits from excess capital (versus captive not controlled

by a connected party)

Key Implications

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Existing PCC cell

user

• Ensure cell still fit for purpose

• Consider alternative domiciles

• Review programme structure

• Consider opportunities from non-UK sources premium

• Consider EEA domiciles

• Consider opportunities for profitable underwriting of additional risk

• Consider opportunities for profitable underwriting of additional risk

Overlay operational considerations

Group with significant non-UK

operations

Group with commercial reason to

consider EEA captive

Group with existing EEA

captive

Group with moderate

captive profits

• Consider opportunities for more efficient funding via a captive structure

Operations

Transfer pricing

Allocation of earnings on capital subscribed / excess capital

Non-trading finance profits (e.g. loans)

Contract structuring

Imbalance of profits (e.g. profit on UK / loss on non-UK)

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Key Implications

The new regime creates opportunities – but not without complications

Companies should consider how relevant the opportunities are for them in

respect of existing or new captive structures

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Directors: Regulatory Expectations & Corporate Governance December 2013 Darren Wadley LL.B (Hons), F.I.C.A., A.C.S.I., C.A.T., Int.Dip(Comp), Int.Dip(AML)

Agenda

• Minimum Criteria for Licensing • Corporate Governance • Codes of Practice • Future Proofing • Recent Regulatory Activity / Onsite Visits

Minimum Criteria for Licensing

Integrity and skill: • Prudence and integrity; • Professional skill appropriate to the nature and

scale of his activities; • In a manner which will not tend to bring the

Bailiwick into disrepute as an international finance centre.

Schedule 1, The Regulation of Fiduciaries, Administration Businesses and Company Directors, etc (Bailiwick of Guernsey) Law, 2000 as amended


Fit and proper persons (director, controller or partner):

• His probity, competence, experience and soundness of judgement for fulfilling his responsibilities … of that position;

• Act with diligence; • Conflicts of interest; • Educational and professional qualifications, membership of professional

or other relevant bodies and continuing professional development; • Knowledge and understanding of legal and professional obligations • Policies and procedures to comply with legal and regulatory framework; • Record of compliance with legal and regulatory framework; • General conduct and activities. Schedule 1, The Regulation of Fiduciaries, Administration Businesses and Company Directors, etc (Bailiwick of Guernsey) Law, 200 as amended


Composition of the Board: • Directors with executive responsibility; and • Directors without executive responsibility*.

* At the discretion of the Commission. Schedule 1, The Regulation of Fiduciaries, Administration Businesses and Company Directors, etc (Bailiwick of Guernsey) Law, 200 as amended

Business to be conducted in a prudent manner:

• Capital / Insurance requirements; • Financial management; • Record keeping / systems; • Responsibility for staff; • Complaints history; • Does the structure or organisation of the group

hinder effective supervision. Schedule 1, The Regulation of Fiduciaries, Administration Businesses and Company Directors, etc (Bailiwick of Guernsey) Law, 200 as amended



Things to consider regarding minimum criteria for licensing: • This is not a one-off, consideration must be given to this

ongoing; • GFSC can look to this when considering enforcement; • Individual responsibility; • Twin peaks regulation, more focus on prudential regulation; • NED involvement, what are their responsibilities?

Code of Corporate Governance

A brief overview / reminder of the principles: • Companies should be headed by an effective Board of directors which is

responsible for governance; • Directors should take collective responsibility for directing and

supervising the affairs of the business; • All directors should maintain good standards of business conduct,

integrity and ethical behaviour and should operate with due care and diligence and at all times act honestly and openly

• The Board should have formal and transparent arrangements in place for presenting a balanced and understandable assessment of the company’s position and prospects and for considering how they apply financial reporting and internal control principles

Finance Sector Code of Corporate Governance, September 2011

• The Board should provide suitable oversight of risk management and maintain a sound system of risk measurement and control;

• The Board should ensure the timely and balanced disclosure to shareholders and / or to regulators of all material matters concerning the company;

• The Board should ensure remuneration arrangements are structured fairly and responsibly and that remuneration policies are consistent with effective risk management;

• The Board should ensure that satisfactory communication takes place with shareholders and is based on a mutual understanding of needs, objectives and concerns.

Finance Sector Code of Corporate Governance, September 2011



Corporate Governance Self Assessment

• How was this carried out and documented? • When was it completed and how often is it reviewed? • Is it easy to read and understand (referenced back to the CGC)? • Recent consultations within insurance industry.


Corporate Governance Self Assessment things to consider:

• Objectives, strategy and remit; • Performance management; • Relationship with key stakeholders; • Risk management; • Effectiveness of any Committees such as internal audit or compliance; • Boardroom culture.


Other things to consider on Corporate Governance: • Minutes of Board meetings:

Attendance Conflicts of interest (do you have a register? How do you manage /

mitigate conflicts?) Matters arising Decision making process Action points


Key Corporate Governance documents (recent onsite visits): • Minutes • Compliance / AML / Operational Manuals • Conflicts of Interest Policy • Anti-Bribery & Corruption Policy (particularly assessment criteria) • Compliance Reports to the Board • Corporate Governance Self Assessment • Business Risk Assessment • Business Plan

Code of Practice – Company Directors

The duties as set out in the Code of Practice – Company Directors: • Understand and act in accordance with their legal duties and the constitution of

the company and seek advice on those where necessary; • Ensure the Board of directors has effective control of the company; • Treat the company as a separate legal entity from its shareholders, directors and

others and avoid conflicts of interest with it or deal with them in accordance with the company’s articles of association;

• Know who owns the company in accordance with AML / CFT regulations and the GFSC Handbook;

• Know the company’s business and finances and have full and up to date information on them;

• Ensure that the company keeps proper accounts and records, observes the minimum record retention periods under any applicable laws, and files accounts and returns as required by law;

Code of Practice – Company Directors, 1 August 2009


• Company Directors must both themselves comply with, and ensure that any company of which they are a director complies with AML / CFT regulations and the GFSC Handbook;

• Consider whether to resign from office and / or to notify the Commission of the circumstances if they believe that the company is being used for illegal purposes, trading wrongfully or breaking the law in other ways;

• Ensure that they have adequate experience, expertise and resources to enable them to discharge their responsibilities as directors;

• Ensure that the basis on which they are to be remunerated is agreed or recorded in writing;

• Co-operate fully with any regulatory or other authority which is entitled to information about the company’s affairs

• Not attempt to avoid those responsibilities by purporting to contract out of them or assigning them to others.

Code of Practice – Company Directors, 1 August 2009


Codes of Practice – Company Directors, things to consider: • Not a statement of law; • Failure does not automatically make a director

liable for sanctions; • GFSC and / or the Court may consider compliance

with the Code when making enforcement decisions.

The GFSC Handbook also places obligations on directors, for example: • Board policy for compliance oversight; • Board policy for training and awareness of staff; • Board policy for AML / CFT take-on procedures and ongoing screening

(including sanctions); • Adequate resourcing; • Business Risk Assessment; • Client Risk Assessment; • Record Keeping.

AML / CFT Governance

Conclusion

There are many sources for directors obligations: • Common law; • Statute; • Regulation; • Codes of Practice / Best Practice; • Rules. Most are based on similar principles. It is important that each director ensures they understand their obligations and identifies the sources that apply to their role. Complacency is not a defence!

Corporate Risk Solutions Limited PO Box 248 3rd Floor, Part Court Park Street St Peter Port Guernsey GY1 3QG Tel: +44 (0)1481 742135 Fax: +44 (0)1481 742136 Email: [email protected]

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