Diversification of Gibraltar’s insurance industry, with an emphasis on European expansion, forms part of an ambitious plan to further grow the sector as a major constituent of the jurisdiction’s finance centre

Gibraltar’s insurance sector has seen huge success in recent years; 56 firms are licensed and, with some 450 staff locally, reported a combined gross premium income of £3.8bn in 2012 (the latest available figures). Of that, £50m was life business, £795m captive insurance and £2.99bn constituted the non-life sector – up 11% on a year earlier.

Minister for Financial Services, Albert Isola, revealed at the launch of the ‘Gibraltar Finance Business development Plan 2014’ in March that the jurisdiction’s marketing agenda includes targets such as insurance and pension markets in Bermuda (June), Johannesburg (July) and Hong Kong (September).

South Africa has a well-developed insurance sector as Michael Ashton, the Finance Centre department’s insurance specialist, found in November, when he attended the country’s Insurance Conference in Sun City. He felt then that many there had generally low awareness of Gibraltar’s depth of insurance expertise compared with Dublin, Luxembourg and Malta.

However, Gibraltar already has three South African-owned insurance businesses – two under the Red Sands banner (life and non-life – motor focusing on Eastern Europe) and Euroguard, a Protected Cell Company (PCC), used in conjunction with passporting of insurance products throughout Europe.

The first annual survey of members of the Gibraltar Insurance Association (GIA) published in April shows the majority of industry professionals is optimistic about the future, but believe that “while the emerging markets will play a significant role in the future growth of Gibraltar, the UK and Europe are likely to remain the primary markets for Gibraltar insurers”.

Getting to grips quickly with new EU rules to ensure insurers have sufficient capital to withstand unexpected problems – the Solvency II Directive – is at present a major issue for local firms.

Some, such as Enterprise Insurance chairman Andrew Flowers, see it as “an opportunity and not a threat”, by introducing new disciplines into the business. Formed a decade ago, the Gibraltar-based firm employs 45 staff and says it is among the jurisdiction’s largest insurance underwriters with gross premiums of over £150m last year.

“Solid regulation and oversight of insurance is a good thing,” he maintained, and Enterprise, a niche market wholesale insurer providing warranty protection for AA and Argos clients amongst others, is “in a very good state of preparedness, but I’m not sure how much of Solvency II is really necessary.”

In particular, he is concerned by capitalisation requirements, “which should be proportionate as to the type of business being underwritten. We are making sure we are fully capitalised, but it’s difficult to say for certain at this stage how much will be required”.

That feeling is echoed by Quest Group founder, Steve Quinn, who said: “The logic of Solvency II is there to provide a level playing field, but the implementation has to be proportionate to the size of each operation.”

Wake up call needed

In just over 18 months’ time, insurers will have to be fully compliant with Solvency II, and meet various corporate governance issues by the end of this year, including documenting management policies toward risk, and thereafter meeting capital requirements based on a standard model of calculation to deal with unforeseen issues.

Quinn fears that the timescale to achieve all Solvency II requirements will be taxing for smaller firms and that “some people in the industry need to have a wake-up call.”

It was good that large firms such as Transalantic Reinsurance Group (TRG) and Arch, a Bermudan-based reinsurance company, have been established in the territory to sit alongside existing insurers. But he was concerned that “if an insurer is writing, say, £30m of business with the help of small, unrated reinsurance or co-insurance partners, they may be less able to deal with problems that could arise, because there is insufficient core capital in the business to support the insurance book – and that in turn could lead to a domino knock-on effect.”

The new Financial Services Commission (FSC) chief executive, Samantha Barrass, agrees the EU Directive will have a big impact on firms, “with a ton of guidance and things coming out from EIOPA [the European Insurance and Occupational Pensions Authority], and we have to get on top of it”.

The FSC already had extensive background material and Barrass wants to move swiftly. “It’s really important for Gibraltar and for the reputation of our regulation that we are seen to be on top of European requirements; there is so much to deliver, but I want to do this in a way that manages the impact.

“It is not going to be easy, but I want to minimize the difficulty. The only way we can do this is a shared programme with industry and with government involvement,” the Regulator declared.

According to Chris Johnson, GIA chairman, the FSC is encouraging companies that are considered relatively low in uncommitted capital to increase the amount in stages.

Capital challenges

“The issue applies to Europe as a whole, of course: the level of capital that must be within the business is driven by the amount of insurance that is underwritten and one alternative is to reduce the amount of business that they are writing; it depends on the cost of capital and the desired return on equity,” Johnson suggested.

It is estimated that over £100m of fresh capital already has been pumped into Gibraltar insurers to help meet expected Solvency II requirements. However, reaching the required levels of capital could be a challenge for some companies, particularly for small independent firms.

Within the motor market, there is concern that some companies’ reserves to cover accident claims between 2007-2010, for example, are proving less profitable, because of a rise in personal injury claims, which in turn may require those insurers to recapitalise.

Gibraltar accounted for 16% of all UK motor business in 2012, much more than Lloyds and up from 10% a year earlier, “but we have to question how much larger we can get in this respect – maybe 25% of the UK market, but I don’t know”, Ashton feels.

Gibraltar’s four largest motor insurers – Admiral, Advantage (Hastings), Acromas (SAGA and AA) and Zenith – together wrote £1.83bn in 2012, and each of those companies is licensed to write across a range of classes.

“Geographically, the vast majority of Gibraltar’s gross premiums arise from the UK – 80% or more – so I am talking to existing insurance businesses and potential new entrants and asking them to think about what Gibraltar can offer on a pan-European basis given the opportunity of EU passporting rights,” Ashton explained.

Opportunities exist for motor insurers throughout Europe, he maintained. Last year, Bermuda-based St Bernard Assurance established a Gibraltar operation and, as an initial step, applied to the Swiss regulator for a branch licence to utilise passporting rights for vehicle and property insurance. If successful as expected, the firm will look to set up similar operations elsewhere in the EU.

Two other Gibraltar insurers, MCE – specialising in motorcycle cover – and Nelson, operating in motors, are understood to be similarly looking to extend into Europe.

The jurisdiction has also set its sights on gaining a share of the $US 7.5bn a year insurance linked securities (ILS) market, broadly defined as financial instruments – typically hurricanes, windstorms or earthquakes – and are the result of the process of convergence between capital markets and the insurance industry. ILS has developed rapidly in recent years with investors attracted by returns that are largely uncorrelated with the general financial markets.

Bruno Callaghan, of Callaghan Insurance and Willis (Gibraltar), joined Ashton last September on “a fishing trip to Bermuda to gauge the extent of appetite for making Gibraltar a European hub, as an alternative to Dublin and Malta, for example”.

In March, they and others locally attended a specialist ILS conference in New York, considered the global centre where such risks are assembled. “The interest there was huge and as a result, we have one licence application in progress with the FSC – not a huge one, but the first for Gibraltar and still interesting,” Callaghan declared.

New money coming

As Ashton explained: “Over the last four years, Bermuda has become the major location for ILS fund offerings, taking over from the Cayman Islands. Within the EU, Ireland has been the location for ILS offerings and Malta has recently published its regulations. Gibraltar has had special purpose vehicle regulations for insurance companies in place since 2009 and the FSC will be publishing its ILS Guidelines in the next few weeks. There is a need for some choice in Europe and Gibraltar is an ideal centre for this.”

The advantage from ILS is that new money will come into Gibraltar and businesses locally can be involved in the offering; lawyers and accountants, for example – would pick up extra work from this and the jurisdiction’s PCC approach is ideal for this business.

“The major players in the ILS market are global financial services organisations. If Gibraltar can successful enter the ILS market, the opportunity to raise Gibraltar’s profile amongst these businesses is significant and in other areas of financial services, for example. asset management and funds,” Ashton said.

The Robus Group, which has a Gibraltar operation, claims more than 50% of new Guernsey ILS structures this year, having gained a major market share in 2013 from its office in the Channel Islands – but it is outside of the EU.

Chris Le Conte, the Group’s chief executive, revealed: “Gibraltar and Guernsey complement each other very well as EU/ non-EU participants and we are actively exploring developing a Gibraltar ILS product to enhance our offering.

“While we and our clients are very satisfied with a Guernsey operating model at present, it may be that Solvency II brings opportunities to EU domiciles such as Gibraltar”.

Ray Spencer