Change, Challenges and Opportunities for the Gibraltar Insurance Industry
By Derren Vincent, Executive Director, Willis Management (Gibraltar) Limited
As part of the preparatory phase for the new ‘Solvency II’ regulatory regime effective on 1st January 2016, insurers were required to submit their Forward Looking Assessment of Own Risks (FLAOR) by the end of 2014.
The FLAOR is essentially an embedded and documented risk management process whereby firms continually identify, assess, and (re)evaluate risk with reference to their defined risk appetite and tolerance.
Some of those risks identified, not least the underwriting and reserving risk, will be specific to the companies business models. Others that arise are reflective of wider industry risks and challenges.
Here we highlight just a few of the identified risks which are common to all firms, often interlinked, and relevant to the challenges facing the Insurance industry today:
• Capital and Reinsurance
• Human Resource
The Financial Services Commission (FSC) launched their three year Strategic Plan at the end of 2014. Their Vision of “being the model international financial services regulator” resonates well with our marketing objective of attracting to Gibraltar a greater level of investment and diversity of business model. There is also evidence that the key messages were well received outside of Gibraltar.
Key for licensees and prospective licence holders is the FSC’s Mission of “providing regulation in an effective and efficient manner”. Their Strategic Plan advises that organisational re-structuring is underway with further strengthening of their senior team and sector specialisms planned. Recent ‘Authorisation Workshops’ have been held with industry to explain the ‘stream-lined and un-bureaucratic risk based authorisation process.
We have seen a deliberate increase in this type of ‘active’ communication on a variety of topics with industry which is both welcome and essential to steering a course through the biggest regulatory challenge ever to have hit the European insurance industry.
Solvency II becomes ‘live’ on 1st January 2016 bringing with it numerous challenges for both the regulator and regulated alike, not least due to the release of guidelines and guidance by Europe at a relatively late stage in the process. As such, much clarification and work remains in 2015 which will consume a large amount of resource in order to ensure that Gibraltar remains a compliant jurisdiction.
Continued partnership with the FSC will ensure that we achieve our required outcome and thus preserve our reputation for EU compliance. Evidence emerging from other EU jurisdictions suggests that despite the best of EU intention, the playing field remains less than level elsewhere in terms of requirements relating to the preparedness towards Solvency II compliance. Gibraltar intends to remain safely on the compliant side of the playing field.
Capital and Reinsurance
According to recent commentary from the reinsurance broking fraternity, the 1st April renewal season continues to follow the current trend of the market favouring the buyer. As such, reinsurance markets are seeking to implement major changes in their strategies and business models. Joint ventures accessing lower-cost capital and M&A activity is evident which may prolong the soft market. Diversification of portfolio and speed of execution is becoming a key competitive advantage.
Insurance Linked Securities (ILS) funds and managers are also affected with some smaller stand alone business models under duress. Experts observe that they are evolving into a more traditional reinsurer model at the expense of diluting the differentiation of their offering which has been so attractive to
primary buyers to date.
Against this background the UK Government have announced that it will work with the (re)insurance industry to develop a competitive tax structure to attract more ILS business to the UK. This is a reminder of the increasingly sustainable role of ILS within the wider global industry. Cat Bond investors are keen to take more risk and competition is healthy to avoid syndication of risks
Whilst the short term looks good for our Gibraltar insurers in terms of the cost of their treaties, we might speculate that with an ever changing global reinsurance market, Gibraltar is now positioned well as a jurisdiction of choice for locating a reinsurance vehicle. In this regard, the FSC has specifically issued clear ILS Guidelines in consultation with leading ILS practitioners. It is also pleasing to see that the Gibraltar Stock Exchange (gsx) has recently announced the listing of its first fund. This low fee, fast to market offering complements the Gibraltar ILS proposition.
Under Solvency II insurance regulations, the quantity of regulatory capital required to support insurance businesses has generally become greater. This is not a challenge unique to Gibraltar and will no doubt herald a period of merger and acquisition activity across Europe including the raising of additional capital in different shapes and forms.
Regardless, anecdotal evidence suggests that these new capital levels are not a barrier to Gibraltar doing new business. Established insurance groups seeking speed to market for additional capacity, or simply a foothold in the EU insurance market, continue to show genuine interest in establishing their vehicles in Gibraltar. Capital Market commentators for example, suggest that Asian investors also continue to be highly active in searching for insurance investment opportunities in developed insurance economies.
So, for companies with access to capital, the Gibraltar proposition of ‘speed to licence’ and accessibility of the regulator continue to be attractive.
A professionally qualified workforce is fundamental to underpinning reputation, market confidence and consumer protection.
The FSC have already made reference to strengthening their own senior team and sector expertise. The recent report issued by the Gibraltar Insurance Institute (GII) confirms that our Industry are also upholding their part in the bargain.
During the last term of office the technical seminars and professional examin-ation courses organised by the GII have been extremely well attended. Membership of the institute also exceeds 350 representing over 80% market penetration.
Government and Employers are demonstrably supporting professional development in the insurance sector and importantly more and more employees are attaining professional qualifications. The advent of our on-line examination facility has been a huge success with 143 exams sat using this new technology since July 2014, providing our Members with a fast-track to professional qualification.
Reputation Risk is strategic, behavioural, intangible, and consequential in nature. It cannot be measured and manifests as an erosion of trust. However, it can be managed but importantly management of reputational risk is a shared responsibility.
Reputation is the basis for trust of our Insurance industry, whether that be investor or consumer trust. Stakeholders include regulators, media, consumers, firms, employees and investors. The level of loss of trust will determine if the damage to reputation is retrievable which in turn will depend on existing good will, the nature of the threat, and how one responds to the threat.
Everyone has a role to play to establish enough goodwill amongst stakeholders in order to ensure that should a threat event arise, trust and confidence will return with time and with the appropriate corrective response.
As an industry we share a collective responsibility for the:
• Promotion of market confidence and public awareness
• Protection of Consumers and of Gibraltar’s reputation
• Reduction of systemic risk and financial crime
Although these are word for word, the regulatory outcomes set by statute as outlined in the FSC Strategic Plan, evidence suggests, not least through the FLAOR process at individual company level as well as through collective discussion at industry body level, that the insurance industry is completely aligned with these objectives.
The challenges facing the Gibraltar Insurance Industry in 2015 and into 2016 are not unique to Gibraltar. It is imperative that Industry and Regulator together do all they can to demonstrate to stakeholders that they are addressing these risks and in doing so, are ensuring that these issues continue to be seen as ones that are faced by many other EEA states.
We are seeing with our own eyes that ‘Change brings opportunity’ and whilst there are challenges ahead, the general regulatory change across Europe is also providing opportunities. In the past 12 months we have seen capital providers and major insurance players actively looking at Gibraltar more often than not because of its ability to do business quickly.