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Insurance
Continued from page 12
Education still needed
Stephen Mumford, finance director at Advantage Insurance, emphasised: “Irrespective of the principle activity of the company, all members [of the Board] need to be educated in S2; it’s going to be difficult to provide for it in the smaller/mid-sized companies that do not have the necessary resources and access to support.”
Gibraltar’s ability to create Protected Cell Companies (PCCs) enables insurers still to flourish, because that structure enables risks to be contained, so eliminating S2 issues, apart from capital requirements.
Having worked with leading Gibraltar insurance companies, Nigel Feetham, a senior partner with Hassans law firm, said: “S2 doesn’t sit well in terms of smaller owner- managed businesses. I was involved in drafting the original insurance legislation for Gibraltar in 1996-7 and I have seen the entire industry here grow from a couple of captive companies, and from my experience some of the companies who were licensed in the early years probably would not be licensed today; it’s capital, governance and culture.”
He went on: “Some of the businesses we saw in Gibraltar 10 years ago are very well- embedded in the local industry, but as a consequence if someone came along with the same business today it may well be that they might not meet requirements as, say, if they were setting up the insurer from a small broking business.”
Capital return challenges
Allan Christian, a KPMG S2 expert, until recently employed by UKPRA, contended that S2 of itself was not considered a barrier to entry for smaller innovative entities wishing to set up in Gibraltar – the main concern remaining was return on capital, rather than potentially onerous S2 governance requirements. It was a point supported by Quinn, who defended local well-run companies, saying: “The challenge is return on capital under S2.”
However, Quinn noted: “With monoline insurers in particular –although already at nearly 300% of the previous S1 capital requirements - that will only just take them over the line for S2, because their balance sheets are shrinking, the capital requirements are going up, or they have to raise subordinated debt or other finance just to get over the line”.	She questioned whether motor underwriters, for example, might say ‘I’m going to start doing property, marine, miscellaneous and a whole lot of other types
of insurance, to give diversification and make capital go further’.
Morrissey, referring to captive insurers, declared: “People are saying ‘we have always made money, we have always underwritten carefully and always looked after capital’, and it is the S2 capital overlay on top that has caused a lot of concern amongst captives, including those in Ireland and Malta.” He went on: “There is a lot of talk about how proportionality applies to captives and I see that as a corporate business there is no way I would set up a captive.”
For Gibson, who founded CGICE in 2003, such are the demands of S2 that “I would think twice before starting from scratch again.”
Instead, he felt it would be wiser to use other capital available and would look to become a Managing General Agent (MGA), going to firms with capital resources like Arch Re-owned, Watford Insurance Co (that set up in Gibraltar late last year), and working from commissions without becoming liable for any of the risks that S2 is designed to capture. “The MGA business would be worth twice as much as the insurer”, he remarked.
As a result of S2, Feetham predicted the local insurance industry in the medium to long term, being made up of only two tiers; “very large players – very well-managed businesses with very good infrastructure, well-known insurance brands – and mid-sized owner-managed businesses such as CGICE.”
That would not be negative for the jurisdiction, Feetham said, “because around 90% of corporate tax paid in the insurance sector is probably from the larger players, and they are leading in innovation.
The expectation is that the owner- managed, mid-sized players in 10 years time will themselves become big players in their market. Of course, the challenge for the future is to ensure that we also keep the best companies in Gibraltar”.
Nigel Feetham (Hassans), Liz Quinn (Quest), Alain Dufraisse (Aon) and Jon Tricker (KPMG) agree smaller entities face tougher prospect.
Morrissey remarked: “It’s important to have somebody come in and walk through the core methodologies, for example. There is a lot of capital management activity using S2 numbers, which surprisingly have not been fully scrutinized or challenged.	He added: “In the owner managed and entrepreneurial organisation, the challenge has been subjecting it to detailed and robust second line or external scrutiny.”
Tricker went further. “As an auditor there is a simple reality where you have a smaller insurer outsourcing key functions to an insurance manager that prepares all of the S2 documentation: and head office will have other things to be thinking about, so that once they have a document meeting S2 requirements, they are going to spend the minimum time possible in tailoring their doc- ument”, he felt.
Reviews by external auditors of S2 policies and frameworks were, unless challenged early in the process, likely to find gaps and areas in need of improvement, which was the reality for companies in Gibraltar by virtue of their size and available resources. “I would expect external audit in the first year to have quite a lot of comments on S2”, Tricker asserted.
For captives, knowledge of S2 when a company’s main activity was in retail or manufacturing, is not a natural thing. As Alain Dufraisse, a director of captive and insurance management firm, Aon (Gibraltar) pointed out: “With captives we had to go through an education process with the directors representing shareholders as they were not always insurance specialists, but the boards are now 100% engaged and do know what is going on with all aspects of the captives activities. Under S2, they need to evidence this consistently, including in the annual board review”
Solvency 2 Round Table
Insurance Sector Participants
Stephen Mumford & Dennis Burns
– Advantage Alain Dufraisse – Aon Phil Hodgson – Argus Danny Gibson – CGICE Liz Quinn – Quest Joe Perdoni & Laurence Thompson – FSC Nigel Feetham – Hassans Andrew Matthews - R&Q
14	Gibraltar International
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