The insurance industry in Gibraltar has grown rapidly in recent years 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. Steve Quinn, Chief Executive Officer, Quest Insurance Management (Gibraltar) Limited, reports
This is the long heralded project to harmonise solvency requirements, corporate governance, and reporting for insurance companies across the European Union (EU). Full implementation will be mandatory with effect from 1st January 2016 onwards (subject to limited transitional arrangements).
For some time now the Financial Services Commission (FSC) has gradually been guiding insurers to raise their capital bases to meet the expectations of SII and has set 200% of the Required Minimum Margin (RMM) as the benchmark that they would wish to see insurers meeting.
New and existing insurers should expect to see solvency requirements of 200% to perhaps 300% of the current RMM. Or stated in a different way insurers’ solvency requirements will be between 40% and 50% of standalone (i.e. without proportional reinsurance support) Gross Written Premium.
Implications of SII
It is quite probable that there will be fewer but larger companies. There is an appetite currently from large private equity houses to acquire in particular motor insurance companies, with a belief that better times may be ahead as rates improve from the rock bottom levels of the last two years.
The shareholders of some Gibraltar insurers are 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 may well gradually draw to a close unless shareholders are able and prepared to raise additional funds.
Some insurers are exploring Rating Agency accreditation, an area that is largely new in Gibraltar. Larger multinational companies are well served by being rated by the likes of AM Best, Standard and Poors, etc. This has not been a particular constraint for much of the Gibraltar market, but some liability insurers would certainly benefit from a strong security rating.
There may be implications on the local insurance managers as well. They have undoubtedly been crucial in growing the business locally and will continue to play an important role in the future. However, the level of technical expertise required by the insurance managers is developing. An insurance management outfit should contain expertise in all requirements of SII and be able to assist clients in producing governance documentation and robust capital models. This has become a core function of the insurance manager alongside other traditional areas of accounting, compliance and company secretarial matters, being intelligently informed about the client’s sector of operation and the investment markets to maximise returns in a prudent manner.
Part VII Transfers and Run-Off Opportunities
A Part VII Transfer is so called as it refers to that section of the Financial Services and Markets Act 2000. It is effectively the movement of an insurance portfolio from the UK either to another home in the UK or to an alternative EU member state. The legislation in the UK regrettably did not name Gibraltar as an EEA state and so there has been uncertainty as to whether a judge needing to approve a transfer to Gibraltar would believe that such a move is legal.
Following several years of industry and Gibraltar Government pressure on the UK Treasury an announcement was made in July 2014 to the effect that Gibraltar now had the ability to accept such transfers. However, as no Parliamentary Order has been tabled in the UK a test case before the courts needs to be heard, and it is anticipated that this will occur soon. If this is approved by the Courts the opportunity for Gibraltar in the run-off or discontinued business arena is an exciting one.
There are many portfolios of insurance owned by larger companies, where new business has not been accepted for some time, but where the incumbent owner would consider disposing of the asset. Gibraltar would be the obvious choice if this issue is resolved.
Gibraltar has already tested the mechanics of the run-off sector by accepting business from the Republic of Ireland where, along with all other EU countries, perversely there are no similar issues.
Gibraltar has stated its case to become the European domicile of choice for ILS business. This strategy has been supported by completion of the first ILS transaction in April. The belief is that the framework exists for a sound business proposition that could gain traction in this growing sector.
So to the Future
Gibraltar is clearly maturing. The key now is to be aware of those areas that require further polish to ensure the jurisdiction can deliver in a manner that produces an image that is as stunning as the Rock of Gibraltar on a clear day.