Newcomers confounding Brexit uncertainty as focus intensifies on solvency compliance
Efforts to attract new insurance business are starting to reap dividends with Gibraltar acting as a gateway to the UK, Ray Spencer finds, and the Regulator is focusing on capital and risk requirements to ensure consumers are protected
Large Gibraltar motor insurers continue to grow and remain the dominant part of the Gibraltar market, but the potential to generate non-motor business over the next few years also looks promising.
Gibraltar Financial Services Commission (GFSC) is processing at least five insurance company licence applications submitted in April and May, compared with just one in the 12 months previous. A further three general insurance intermediary applications have been submitted in the two months, the same as that for the whole of the year to March. In addition there is a life intermediary business in prospect.
At present, there are 61 insurance entities licensed, with a total premium income of circa £4.8bn, and of that the two Life insurance businesses account for just £150m.
It can be revealed that a large US-based insurance entity offering a line of business new to Gibraltar, but aimed exclusively at the UK market, is expected to be “very big”, following its planned launch in August, assuming GFSC approval.
Gibraltar-based insurers mostly underwrite motor policies, the 26 firms together accounting for over 60% of the UK market, although there is a growing diversification, including healthcare, pet, legal and other niche areas.
Admiral, the large UK-facing car insurer, is writing roughly £1bn of premiums in Gibraltar and of that around 10% is now with homeowners.
Another, Hastings Group (through Advantage, the Gibraltar subsidiary), has started in a small way to write home insurance – around 10% of premiums.
Haven, in 2002 was one of the first UK motor insurers to establish in Gibraltar, a decision it said had “proven very successful”, and it is developing products beyond motor business to include household cover, “offering a lifeline for those who struggle to obtain buildings and contents insurance through the mainstream market”.
“There are other businesses looking at Gibraltar”, Michael Ashton, a senior insurance specialist at the government’s Gibraltar Finance, told Gibraltar International. “Gibraltar’s life insurance sector is tiny compared to the non-life sector but new life insurance business are currently looking at the possibility of establishing in Gibraltar.”
Under the EU Solvency 2 (S2) Directive, that amongst other things required insurers from 2016 to have much greater working capital and reserves, monoline insurers can benefit from diversification by gaining credits that effectively reduce the amount of money that must be held to protect against the risk of business failure.
Gibraltar’s Markerstudy, formed in 2001 and best known for motor business, acquired two pet insurance companies – Purely Pets and Paws and Claws – in 2015 after taking over Ultimate Insurance Solutions, cementing a pets diversification move that began two years earlier when gaining BDML. Growing from one to 12 staff, the firm now insures and brokers a number of non-motor related
products, including commercial (non-motor), travel and gadget/mobile phone and home insurance.
The widening scope was not prompted by S2 requirements, however: “We are a dynamic underwriter who will write classes where we see an opportunity to make a profit. Pet business is treated more harshly than motor under Solvency 2, for example”, Markerstudy said.
Nevertheless, Ashton suggested: “S2 has been a game changer for the insurance sector. Previously entrepreneurs were able to
establish a new insurer with the minimum capital requirement, but S2 has introduced more onerous capital requirements. I believe we will see fewer smaller insurance start-ups in Gibraltar.”
Some insurers have reduced their underwriting capacity because of capital constraints. Even so, some other firms are said still to be coming to terms with S2, particularly the capital requirements, and industry insiders describe them as “living on borrowed time”!
Casualty & General Insurance Company (Europe), a privately owned company was one of the first non-motor insurers in Gibraltar in 2003 and specialised in defects and surety business in the UK and across Europe, including Belgium, France, Germany, Ireland, Italy, Netherlands and Norway.
However, in March CGICE ceased writing its UK motor book – premiums £20.4m last year – following the decision by the UK’s Lord Chancellor to reduce the personal injury payment discount rate of calculation from 2.5% to minus 0.75%, and the market volatility which followed. CGICE was unable to gain sufficient reinsurance cover at an acceptable cost, but it “continues to monitor future developments”, according to its Solvency and Financial Condition Report for 2016, just published.
Similarly, Gibraltar’s Horizon Insurance (formerly known as Octagon) stopped renewing or accepting motor policies from end-December; the directors said it was because they were unable to secure additional funding to meet business plans from 2017 – but, crucially, emphasised the decision was not related to S2 capital requirements.
The Gibraltar government was also in March forced to step in and issue a statement emphasising “its complete support for the insurance sector in Gibraltar and confidence in the important role played by the GFSC in delivering high European standards of insurance regulation”.
The unusual move was prompted by media reports on comments by the Irish Regulator, the Central Bank of Ireland and in the Irish Parliament that suggested not enough had been done by Gibraltar’s regulator to prevent a repeat of last year’s collapse of locally-based Enterprise Insurance, which hit 14,000 Irish motorists.
Enterprise spectacularly failed when the GFSC ordered the firm in July 2016 to cease trading to protect a total of 760,000 policyholders in six countries after it was believed to be insolvent – the liquidator subsequently appointed, confirmed there was “a
prospective balance sheet deficit of some £96m”.
Samantha Barrass, GFSC chief executive, robustly defended the regulator’s work, saying she had utilised “new powers available to the Commission under Solvency 2 to ensure the Commission has the right information to support our supervision”. She emphasised: “We proactively share information with all the host state regulators of the jurisdictions in which our Gibraltar insurance companies operate and we participate in joint supervision activity.”
The eleven Gibraltar firms passporting motor insurance into Ireland, “contribute 6% of gross written premiums to the Motor Insurance Bureau in Ireland and 2% of non life premiums to the local Insurance Compensation Fund that was set up in 2012 to contribute to the losses sustained in Ireland following the €1bn collapse of the Irish insurer, Quinn,” the government revealed.
By end-2016, Gibraltar firms operating in Eire had contributed some €7m to the Irish compensation schemes and a further €4m+ expected this year. “This will more than meet the estimated losses arising from the Enterprise failure in Ireland”, the government maintained. (Gibraltar firms have also contributed some £350m to UK compensation schemes.)
In April, the GFSC said it “may have been significantly and consistently misled” about the true financial position of Enterprise, licensed in 2004, adding: “The extent of the financial collapse of Enterprise is unprecedented.”
The Finance Centre’s Ashton was sanguine: “No-one wants failures in a jurisdiction, but it is a fact that insurance companies are there to take risks and sometimes they fail like any other business: whilst we must do as much as possible to avoid such failures, there will always be the possibility of an insurance failure if a jurisdiction wants to build an insurance industry.”
Ongoing sore
Andy Baker, a senior insurance professional in Gibraltar, commented: “As I am sure anyone in insurance here will agree, the Enterprise failure has wounded our local reputation and it will be an ongoing sore for sometime; competing jurisdictions will be using it against us, but in truth it is just one of several insurance failures that have occurred around the world.”
He felt countries increasingly will “not accept EU passporting into their territories simply by notification, and are now moving towards an individual approval process”. There were several areas of the S2 policy open to interpretation and international meetings have been developed to avoid differences in approach between jurisdictions.
Joe Perdoni, GFSC head of prudential, told Gibraltar International. that, although there were a few firms that had “transitional arrangements” from the start of S2 in January 2016, by June all were compliant. “That isn’t to say some firms are not still struggling with S2; it’s much more complex than S1 and subject to a lot of assumptions firms make on meeting those capital requirements.”
Gibraltar’s insurers (excluding captives) took part in a GFSC-led quality assurance review in March to ensure similar capital assumptions across the market. “Some of those findings mean firms will have to complete calculations slightly differently – some are fairly straight forward, but some firms will have to rework their numbers”, Perdoni explained.
Drilling down.
GFSC chief executive Barrass, added: “As with other insurance regulators, the initial focus of S2 was on capital levels and reserves issues, but since January this year we have been drilling down into other aspects – the approach to risk management and governance – within insurance companies. There will be those companies that just got over the line and they are the ones we will be paying greater attention to.”
Prior to S2, the insurance sector in Gibraltar generally was hovering much more around [lesser] S1 requirements on capital and their governance approach to risk
management, she observed.
Premium Insurance was set up in March after a 15-month licensing process by investors, also owning Slovakia’s largest independent insurance broker, because “Gibraltar had an experienced regulator, it was open for business and open to discussion,” declared Baker, who has become local managing director. Premium was the first insurance company licensed after the Brexit vote.
Having decided to open an insurance company in Slovakia, “the regulator [there] was refreshingly open and honest and admitted that they didn’t know how to do that,” Baker, a former advisor to the GFSB and a president of Gibraltar Insurance Association, noted. It was recommended they find another [EU] base jurisdiction to passport into Slovakia and the Regulator was comfortable with use of Gibraltar.
Writing only commercial business, Premium is not UK-focused, so if Brexit meant the end of passporting in 2-3 years’ time, “there is no lifeline, but by then there would be a proven track record and capital built up, so [Premium] could re-domicile easily”, Baker observed, or choose to continue with its present arrangement with Artex International, Gibraltar’s largest insurance management business.
Part of A J Gallagher, a Chicago-based company, Artex first bought Heritage Insurance Managers in 2014 and then acquired Quest in mid-2016, merging the two local operations at that time. Steve Quinn, Quest founder, has become managing director of Artex in mainland Europe, which includes Malta, and plans to expand into other EU states, “probably later this year”.
Artex already handles 14 insurance companies and six intermediaries. “We expect to license another five or six enterprises not already present in Gibraltar, even with the prospect of Brexit”, Quinn declared. “The majority of those businesses are UK-focused and we have some people prepared to move here, even if it means they may have to shift to another EU location eventually.”
Ashton declared: “What is interesting is that after a 2/3 months period of people accepting that Gibraltar has to leave the EU, then the government survey of financial services found over 90% of our business is with the UK, showing that as a jurisdiction we had not been as successful as we had hoped in attracting business from the rest of Europe but very successful with business into the UK. I believe the message now is around our access to the UK, the world’s 5th largest economy.”.
