Geographically, Gibraltar is an isthmus not an island, and as such it is a part of mainland Europe, attached to the Iberian peninsular, and it enjoys both a Mediterranean climate and a central European time zone.
Geographically, Gibraltar is an isthmus not an island, and as such it is a part of mainland Europe, attached to the Iberian peninsular, and it enjoys both a Mediterranean climate and a central European time zone.
Politically, it is also a part of Europe. As a self-governing overseas UK territory with separate legal jurisdiction, it is a member of the EU with its parliament solely responsible for the transposition of all EU directives as well as the enactment of all domestic laws.
It is this geopolitical situation that provides the foundation for the Gibraltar insurance opportunity.
Direct writing
Put simply, EU membership affords ‘passporting’ rights to a Gibraltar licensed insurance vehicle to underwrite risks across all 31 EU and European economic area member territories.
For pure captives, this provides, among other things, the opportunity to avoid fronting costs and associated letters of credit. There are also cash flow and counterparty benefits.
However, more strategically, it affords greater control over coverage and appointments of third party service providers, such as claims service providers, whose interest can be aligned with that of the captive. Crucially with this control, the whole claims process can be designed from incident to settlement so that it complements the parent’s desired enterprise risk management outcomes and customer experience.
Establishing an EU-licenced vehicle affords open market insurers a foot in a market of more than 500 million people from one central overhead and without fear of double regulation. This is an attractive opportunity for capital providers, both in terms of investing in startups or for existing insurance capital looking to expand into Europe.
Reputational risk—onshore underpinned by EU directives
Gibraltar is not only geographically onshore but it is also clearly and demonstrably fiscally onshore.
Corporate reputations are forged over long periods of time and with great endeavour, but they can be lost in a moment. When tax cases go to court, media interest is high and public perceptions are made. With corporate transactions coming under public scrutiny, corporate responsibility is now extending to affect choice of domicile.
With regards to its taxation policy, the European Council of Economic and Finance Ministers of the EU member states (ECOFIN) has endorsed Gibraltar’s Income Tax Act as being compliant with the EU code of conduct for business taxation. Therefore, Gibraltar’s tax system has been fully endorsed by both the code group and ECOFIN. The EU code of conduct has become the yardstick by which harmful tax measures within the EU and in the overseas territories of EU member states are assessed.
As already mentioned, Gibraltar is subject to, and has enacted, all EU directives. Specifically, Gibraltar has transposed EU Directive 2011/16 on the exchange of information on tax matters, which are recognised by the Organisation for Economic Co-operation and Development (OECD) itself as being equivalent to a tax information exchange agreement (TIEA), thereby providing OECD-equivalent exchange mechanisms with the 28 EU member states.
This is in addition to the 26 bilateral and voluntary TIEAs already in existence with both EU member states and other major OECD member countries.
Gibraltar’s long established and growing market
Ignoring domestic insurers, Gibraltar’s international insurance roots go back further than the current 1987 Insurance Companies Act. It’s oldest captive has been trading for nearly 30 years.
Over the past 20 years the number of Gibraltar insurers has expanded from 12 to the 56 that are underwriting new business today.
In 2011, Gibraltar’s insurers wrote $6.1 billion, an increase of nearly 20 percent over 2011 with collective assets of more than $14.4 billion and taking some 10 percent market share of the UK motor market.
What’s different to the rest of Europe?
Having made the case to locate in Europe, what is the Gibraltar insurance proposition?
The benefits of domiciling in Gibraltar include:
Speed of doing business: the speed in obtaining either a licence, or a regulatory decision, is second to none and facilitates rapid access to what is an extremely dynamic marketplace. It is not only the initial access to market, but also the ongoing ability for insurance firms to make rapid business plan decisions and changes, that sets Gibraltar apart.
Size of the domicile affords an accessible form of regulation underpinned by the regulators service level agreement with its stakeholders. The Financial Services Commission seeks to determine an insurance licence application within 18 weeks of a full submission and publishes its performance levels in this regard.
Competitive tax measures: business agility is complemented with a competitive 10 percent rate of corporation tax that has the endorsement of the EU.
Additionally, there is no capital gains tax and zero VAT that serves to make up a truly unique opportunity within the EU and no tax on investment income.
Protected cell and special purpose vehicle legislation: the ability to have an alternative option to a wholly owned, full blown insurance subsidiary is also clearly attractive given the 32 cells that are currently under management. The cell option can offer a capital and cost efficient way of accessing all the advantages of the European passport without the additional governance and capital requirements that go along with owning your own captive.
Special purpose vehicle legislation also exists under the Insurance Companies (Special Purpose Vehicles) Regulations 2009. In the first half of 2013, we have seen global catastrophe bond issuance reported to be at $4 billion, the highest in the last six years. With collateralised reinsurance coverage from the insurance linked securities markets continuing to offer more competitive pricing than the traditional reinsurance market, there is an opportunity for Gibraltar to leverage their competitive EU positioning.
Strong economy: despite the European and global economic downturn, Gibraltar is forecast to deliver a GDP rise of 7.8 percent for 2012/13. Gross public debt fell by 27.5 percent. Net debt has also fallen and stands at approximately 24 percent of GDP. Gibraltar has produced a recurrent budget surplus that was £20 million higher this year. This strength in economy allows Gibraltar to invest further in its financial services sector and infrastructure ensuring a first class service.
So what business has been done and what about the future?
Captives: examining the captive sector, Gibraltar has well capitalised captive vehicles owned by blue-chip listed parents. In many cases, their size determined the fact that the direct writing opportunity delivered a fronting cost and letter of credit saving.
However, size is not everything, as many cell owners will testify. Many use the Gibraltar cell to front their European risks and then consolidate their worldwide risks through reinsurance back to their main captive vehicle domiciled elsewhere.
Some captive owners with a well-developed customer base have extended their direct writing opportunity to write customer risks, thus creating additional revenue streams or reducing leakage in existing programmes. Once again, there is the strategic advantage of being able to react more quickly to customer needs and market developments without the friction of fronting.
Many column inches have been given over to so-called emerging risks and other non-traditional captive lines, eg, cyber, environmental liability, reputational risk and crisis containment. Much work is being done to identify, quantify, and mitigate their impact. The freedom provided by the ability to direct write is entirely complementary with providing protection in these areas. Evidence of this is already emerging in Gibraltar.
Reinsurers: in the last couple of years we have seen three major global reinsurance capital providers put vehicles in Gibraltar, not just to be nearer the Gibraltar open market insurers whose treaties they participate in, but also to offer a more capital efficient co-insurance position as an alternative to quota share with Solvency II in mind.
Run off vehicles: the first run off vehicle was licensed in the last year in Gibraltar. It is the recipient of a book of business from Ireland.
Estimates suggest that the market in discontinued insurance is approximately €220 million. If European insurers determine that long-term run off is not viable particularly ahead of Solvency II, or if they simply deem some lines as no longer core to their business, the restructuring activity is likely to increase.
The competitive rate of Gibraltar corporation tax is clearly attractive to investors in specialist run off vehicles.
A final added point of interest in this area is the European Court of Justice (ECJ) decision relating to the case involvng the transfer of a portfolio of reinsurance contracts between Swiss Re entities; from Germany to Switzerland. The ECJ rules that the transaction was a taxable supply of services that makes argument for VAT exemption difficult. it is noted however that the court was not asked to address the question of whether the transfer was one of a ‘going concern’ and therefore outside of the scope for VAT purposes. Nevertheless, although this case is related to a transfer of a portfolio of reinsurance contracts, ther is the possibilty that this decision could be applied to the transfer of other types of financial contracts, where the transfer does not fall within the VAT exemptions.
With effect from 1 January 2010, the change to the place of supply rules means that the place of supply of such transactions is the place of the recipient. This means that if the supply was deemed to be taxable, an EU recipient would be required to account for reverse charge VAT. With Gibraltar being outside of Europe for VAT, the Swiss Re decision may be an interesting offer.
Open market insurers: last but by no means least, we have seen consistent growth in the number of insurers wishing to write third party risks from Gibraltar. Its first insurers primarily wrote UK risks but now we see Gibraltar insurers participating in all the major EU markets across a variety of classes.
As markets shift and capacity changes in differing classes and in differing territories, opportunities exist especially for those agile enough to enter the market at the right point of its cycle or at the right moment. Despite the worldwide regulatory and economic backdrop, we foresee that Gibraltar is well placed to attract new licensees in this sector.
