The insurance industry in Gibraltar has grown rapidly and is now entering its period of maturing adolescence, where it starts to discover some of the more difficult aspects of life as well as attractive opportunities that exist out there, which need to be tamed and won over...
The insurance industry in Gibraltar has grown rapidly and is now entering its period of maturing adolescence, where it starts to discover some of the more difficult aspects of life as well as attractive opportunities that exist out there, which need to be tamed and won over.
No article on major issues facing the insurance sector at the present time would be complete without referring, first and foremost, to Solvency II.
As a reminder, this is the long-heralded project to harmonise solvency requirements and corporate governance policies, procedures and reporting for insurance companies across the EU. Implementation will be mandatory with effect from 1 January 2016 onwards (subject to limited transitional arrangements). The Financial Services Commission (FSC) in Gibraltar already requires insurers to demonstrate that certain plans have been in place since 31 December 2014.
It can be argued that the consequences of the solvency or capital aspects of Solvency II are that some Gibraltar insurers are starting to question the long-term viability of their businesses if additional capital is to be required.
For some time now, the FSC has gradually been guiding insurers to raise their capital bases to meet the expectations of Solvency II and have set 200 percent of the required minimum margin (RMM) under what we could call Solvency I as the benchmark that they would wish to see insurers meeting.
From initial modelling of the financial requirements expected to be faced by Solvency II, the FSC was absolutely spot on to set this as its expectation, and in some cases this may not be sufficient.
New and existing insurers should expect to see solvency requirements of 200 percent to perhaps 300 percent of the current RMM. Or put a different way, new and existing insurers should expect to see solvency requirements of between 40 percent and 50 percent of standalone (ie, without proportional reinsurance support) gross written premium.
In the medium term, there will potentially be fewer but larger insurance companies. There is an appetite at the moment from large private equity houses to acquire insurance companies, and in particular motor insurers, with a belief that better times may be ahead for this sector as rates improve from the rock bottom levels of the last two years or so.
This appetite is being sated in both the UK and Gibraltar, with several ongoing projects to acquire existing companies that may well come to fruition in 2015.
At the same time, and as stated above, the shareholders of some Gibraltar insurers are apparently considering whether now is a good time to exit the market rather than potentially invest further funds to meet the evolving solvency demands. The golden era of the owner-managed Gibraltar insurer will gradually draw to a close if the existing businesses are unable either to show that they will meet the new solvency requirements from organic capital base growth since establishment, or can demonstrate an ability to raise the additional funds required.
Other issues that are being faced by insurers relate to continued uncertainty of what the new world will ultimately look like. I have every sympathy with our local regulator, which is required to interpret somewhat opaque and convoluted legislation that has been written for the 27 different countries within the EU (and beyond for those who are seeking equivalency), while taking account of the differing languages and cultures that make up the incredibly diverse and cosmopolitan continent that is Europe.
The FSC is still getting to grips with the requirements of Solvency II at a point where we are only a few months away from formal implementation of all requirements. One obvious example of this is with the interpretation of groups, where non-trading investment or holding companies that may contain debt may well have a negative impact on a subsidiary insurance company via the group’s solvency position.
As a business, we are working closely with the FSC to ensure that wherever possible, common sense will prevail in attempting to interpret the bureaucratic jargon that has been set down to date.
We are also starting to see insurers looking at rating agency accreditation, an area that has not been addressed in Gibraltar previously. Larger companies are well served by being rated by the likes of A.M. Best and Standard and Poor’s, as this generally allows certain products to be more marketable to brokers in Europe. This has not been a particular constraint for the traditional Gibraltar motor insurance market, but some liability-centred insurers would certainly benefit from a good security rating.
There may be implications on the insurance managers, too. An insurance manager is the vehicle by which the overwhelming majority of insurance companies in Gibraltar have started their lives and grown, perhaps to a position where they have either partially or wholly fled the nest and set up their own local structure.
The insurance managers have undoubtedly been crucial in growing the business locally and I believe they should continue to play an important role in the future. That role may well be changing, however, and the level of technical expertise required by the insurance managers is also developing.
An insurance management outfit should by now contain considerable expertise in all requirements of Solvency II and be able to guide and assist clients (and perhaps non-clients alike) in producing both governance documentation and robust capital models.
This has now become a core function of the insurance manager alongside other traditional areas such as the general accounting requirements, compliance and company secretarial matters, and being intelligently informed about the sector in which the client operates and the investment markets that an insurer may wish to utilise to maximise returns in a prudent manner.
The subject of Part VII transfers has progressed well in 2014 but has sadly not reached a conclusion. As a reminder, a Part VII transfer is so called as it is a reference to that part of the Financial Services and Markets Act 2000, and is effectively the movement of an insurance portfolio from its home in the UK either to another home in the UK or to another EU member state.
When the legislation was drawn up in the UK, regrettably Gibraltar was not named separately as a European economic area state, and so there has been uncertainty ever since as to whether a judge needing to approve such a transfer to Gibraltar would believe that such a move is legal.
For many years, leading players in the local insurance industry have been lobbying the Gibraltar government to apply pressure on the UK Treasury to make the necessary changes. An announcement was made in July 2014 to the effect that Gibraltar now had the ability to accept transfers from the UK, but unfortunately it seems the issue has not been resolved fully as yet.
The UK Treasury has written to the government of Gibraltar indicating that it would raise no objection to such a transfer being approved, but no parliamentary order has been tabled to codify this.
The danger, therefore, remains that a judge, when asked to opine on a transfer, may still question the legality of the transaction and not give approval. In many quarters, to a potential acquirer of a portfolio, the execution risk is viewed as being too great.
If this situation can be resolved to everyone’s satisfaction—and the industry believes this can still only be done via a UK parliamentary order—the opportunity for Gibraltar is predominantly in the run-off or discontinued business arena.
There are many portfolios of insurance that are owned by larger companies, where new business has not been accepted for some time, and where the incumbent owner would be open to disposing of the asset, where Gibraltar would be the obvious choice if this issue could be resolved.
Gibraltar has already tested the mechanics of the run-off sector by accepting business from Ireland where, along with all other EU countries, perversely there are no problems in effecting such transfers.
Areas of future promise include the government of Gibraltar stating its case to become the European domicile of choice for insurance-linked securities (ILS) business.
This strategy has been supported by the emergence locally of specialist ILS insurance management operations, and more significantly than this, the first ILS transaction, which completed in April.
The government has shown a willingness to embrace what is required in this respect by engaging with the FSC as well as global industry experts from all relevant fields such as lawyers, ILS managers, and other service providers, to produce a product which it believes to be market-leading.
This is clearly an area that is new to Gibraltar but the belief is that the soundings taken by the local authorities have provided a framework for a sound business proposition that is well-positioned to gain traction in this rapidly developing sector of the industry. Winning a very small proportion of the global market here would be a significant step forward for Gibraltar.
We have also seen more demand in Gibraltar recently in the arena of intermediaries, or managing general agencies (MGAs). There is no separate definition of an MGA in Gibraltar but we have noted the emergence of several MGA-style operations in recent years, and I believe that this has the potential to develop further in the future, especially as a result of the uncertainties brought about by Solvency II for smaller insurance companies.
For MGA-style businesses, Gibraltar offers regulation at and above minimum EU standards, while at the same time enjoying the passporting rights that allow a business to operate in any EU jurisdiction. There would be a requirement for such a business to demonstrate physical presence in Gibraltar, but access to the regulator and the speed to licence will be considerable draws to businesses such as this in the future.
Gibraltar is clearly developing into a most attractive insurance jurisdiction, but this has not been without the growing pains you would expect to see.
The key is to be aware of those areas that require further work to be sure the jurisdiction can deliver on these in a manner that produces an image that is as stunning as the Rock of Gibraltar on a clear day.
