Insurance Sector Challenges in 2016

By Steve Quinn, Chief Executive Officer, Quest Insurance Management (Gibraltar) Limited

When I was given the opportunity to submit an article to Gibraltar International last year I listed several issues as representing current developments and challenges to the insurance sector including Solvency II, ratings being obtained by local insurers, local operations and representation, Part VII Transfers and ILS opportunities.

Unsurprisingly a year later little has changed. A review of those issues follows but there is of course one new entrant that has usurped all others in the last few months. It is interesting to see that the article I wrote just under a year ago, around the time of the last UK General Election did not reflect the public mood of Brexit as being a major issue at the time.

How the times have changed!

Brexit

It would be impossible to write an article that focuses on challenges to our industry without starting with the elephant in the room. I have never known any topic to dominate both business and social conversations as much as Brexit appears to at the moment. Trying to distil the facts as they are known at the time of late March/April, the key issues to be aware of if the Referendum votes “Out” are as follows:

A UK exit from the European Union would mean a Gibraltar exit as well.
Gibraltar insurers passporting into the UK currently should be broadly unaffected as arrangements in place between the UK and Gibraltar are not strictly reliant on EU law. It should reasonably be expected that the UK will continue to respect the bilateral trading relationship with Gibraltar.
For the rest of Europe the situation is less straightforward. Technically the transition out period should be two years, but withdrawal requires agreement from the European Parliament.

The view is that it will most likely take considerably longer than this for the UK to finally exit the EU, but any extension to the two year period requires unanimous EU member state approval. During this transition period all EU rights should remain. The UK would need to negotiate a new trading arrangement with the European bloc, and without offering any political statement whatsoever, this could take several years (Canada, for example, took roughly seven years from 2007 to negotiate a trade deal with the EU), possibly beyond the transition period.

So in summary how will Gibraltar’s insurance industry be affected by Brexit should this occur? The answer to this is technically probably not greatly, as over 90% of Gibraltar insurance business is conducted with the UK and should be unaffected. Of course there are, however, several currently unanswerable questions that could hugely impact the wider situation, such as:

What will be the impact of Brexit on the EU economy?
What will be the impact of Brexit on the UK economy?
What will be the impact of Brexit on the Gibraltar economy (especially gaming)?
What will happen at the Gibraltar border in a post-Brexit world?

No answers to any of those questions offered here, I’m afraid, as they really are all unknown at the moment.

Turning to other key current issues….

Solvency II

We should probably stop referring to Solvency II as Solvency II now as it really should be Business As Usual. As of 1st January (2016), we are in the brave (?) new world and the market appears to have satisfactorily handled this change.

There were a small handful of insurers that chose to go into run off in 2014 and 2015 but by and large the overwhelming majority have passed into 2016 without the need for Transitional Arrangements from the Financial Services Commission (FSC).

The key over the next few months will be for regulators and regulated alike to become familiar with the changed requirements, to reach agreement on those areas which are open to interpretation, and perhaps a goal for 2017 and beyond will be to not refer to “Solvency II” for too much longer.

Local Operations

When commenting last year I suggested that amongst other consequences one of the implications of the advent of Solvency II may be the requirement for insurers to go further to show their presence in Gibraltar. I still believe this to be the case and it is important that the FSC understands fully what work is undertaken locally.

Some insurers operate with significant local teams, some with smaller ones and the majority via insurance managers. Just because an insurance company has representation from an insurance manager does not necessarily mean that there is little work being undertaken locally, and indeed I am aware of self managed companies locally that could be viewed as being little more than representative offices rather than fully functioning insurance companies. It is not entirely clear at the present time what the regulator will require from new and presumably existing insurers in terms of local presence.

Other challenges that the regulator and the industry locally share jointly relates to understanding the roles and responsibilities that are performed locally. Company boards tend to be quite small compared to – for example – the UK, and as a result it is less likely that each Board member will have a tightly defined job description, rather looser areas of responsibility. This is an area which I expect to be developed further by the regulator this year.

Other Current Issues of interest

Current Comparative Strength of the UK Motor Insurance Market

The Gibraltar insurance industry is dominated by UK motor insurance premium (it is estimated that just under 20% of total UK motor premium currently emanates from Gibraltar), and this insurance market is notoriously cyclical.

It has been enduring a difficult period for two or three years but there are signs that 2016 and hopefully beyond will be stronger performers. This recovery is well timed given the enhanced capital requirements that all insurers face in the new Business As Usual world.

Investment returns

The financial markets have been turbulent for several months now and the prudent insurer will most probably have lowered return expectations with funds being moved away from potentially more risky investments to shorter duration, higher quality asset classes. The market volatility has arisen at a time when the new Solvency II (sorry, Business As Usual) rules have impacted on certain asset classes by requiring higher capital charges being imposed; to illustrate the point, property now incurs a 25% charge whereas a three month bank deposit with a secure institution will incur only 7%.

Rating Agencies

I am aware of several insurers that have obtained strong ratings from AM Best in the last year or so, although many are choosing not to publish these at the present time. I believe this will be an area that will continue to develop.

Part VII Transfers

Sad to report but there have been no noticeable positive developments in this long running saga. Should Brexit happen it would be imperative that the Government of Gibraltar agree with the UK Treasury that Gibraltar be allowed to receive portfolio transfers from the UK. Bizarrely, we have seen further inward transfers from other EU member states, but this door may be closed in a post-Brexit world.

ILS Business

The first of these transactions was completed last year and it is believed a second is imminent. There has not been the steady stream that was to be hoped for as yet, and again I believe it will be an area that is uncertain until after the UK Referendum.