trending Market Intelligence /marketintelligence/en/news-insights/trending/atafkjw6tevo1tmo4edzew2 content esgSubNav
In This List

Brexit, Solvency II transform Gibraltar's insurance market

Podcast

Street Talk Episode 87

Blog

A New Dawn for European Bank M&A Top 5 Trends

Blog

Insight Weekly: US banks' loan growth; record share buybacks; utility M&A outlook

Blog

Banking Essentials Newsletter 2021: December Edition


Brexit, Solvency II transform Gibraltar's insurance market

Gibraltar once touted itself as the gateway to the EU for financial firms — but will not be able to do so for much longer.

The British territory known as the Rock, located at the southern tip of Iberia, will lose its access to the EU single market if the U.K. leaves the bloc without a trade deal that ensures mutual market access, meaning insurance firms writing European business from there will have to rethink their strategy. And, according to Michael Ashton, senior executive at Gibraltar Finance, a division of the territory's government charged with promoting its financial services industry, it may look to rebrand itself as the gateway to the U.K. instead.

Solvency shake-up

With a population of just 32,000, Gibraltar punches above its weight in insurance, with roughly £4.8 billion in total premium written. But if faces challenges from Brexit and other regulatory changes.

SNL Image

New EU Solvency II capital rules mean insurers can no longer head there hoping for lighter-touch regulation. The jump to the new regime from the old Solvency I rules has been a big jolt, prompting some firms to restructure, raise capital or close down.

Also, as most of Gibraltar's premium written is U.K. motor it has around a 20% share of the market the cut in the U.K. personal injury discount rate, or Ogden rate, to negative 0.75% in 2017 has put more strain on the market's collective capital base.

Service Insurance Co. closed down on March 23, 2015, partly because of the challenge of preparing for Solvency II. Horizon Insurance Co. shut up shop on Dec. 31, 2016.

Companies that survived have had to restructure. On April 1, 2017, Casualty & General Insurance Co. Europe pulled out of U.K. motor business, of which it wrote £20.4 million in 2016, because of the changes to the Ogden rate, used to calculate the amount insurers must pay out for serious injury claims.

Prominent player Markerstudy Insurance Co. Ltd. restructured its operations and its debt to ensure Solvency II compliance. And Tradewise Insurance Co. Ltd. secured a £20 million capital injection from private equity firm Harwood Capital LLP, in part to improve its capital position under Solvency II.

There was a particular impetus for change in 2017 because the two-year transition period granted to companies to get up to speed with the so-called solvency capital requirement ended on Jan. 1, 2018. But there could be more change yet to come as regulators get more familiar with the new rules.

Joe Perdoni, head of prudential supervision at the Gibraltar Financial Services Commission, said that, while all the territory's insurers are now compliant with the SCR, there are still some that the regulator thinks should improve their coverage.

"That is something we will be working with them on," he said.

Gibraltar Finance's Ashton said that, although most Solvency II-related changes are complete, there will certainly be further restructuring in the sector in the coming year or so. He said there could be further consolidation among the smaller players partly because of pressures brought on by the new solvency rules.

"Where we are moving, potentially, is to a smaller number of larger insurers in Gibraltar," he said.

Brexit burden

The Brexit impact will be felt, too. Perdoni estimates that 8% of Gibraltar-written premium is non-U.K. EU business.

The good news is that the affected companies are only planning to take their EU business out of Gibraltar rather than leave altogether. One such firm is Casualty & General Insurance Company Europe, which is looking to decide on a location for its European business in the coming weeks.

"Some new investors came in in the fourth quarter last year and they are keen for us to expand our U.K. offering as well as continue with our European operations, so we want to keep passporting open to the U.K.," said CEO Danny Gibson.

Ashton said that, whether Brexit is hard or soft, "it is not going to be catastrophic for Gibraltar."

Brexit could also encourage European companies to set up in Gibraltar to ensure they have continued access to the U.K. One company, Markerstudy-owned St. Julians Insurance Company Ltd, has already made the shift from Malta to Gibraltar.

Perdoni said the regulator has had "four or five" conversations with firms that wish to understand the process they would need to go through if they wanted to redomicile.

It may no longer be the gateway to the EU, but Gibraltar is trying to play to its strengths as it moves to the next stage of its development.

"What I would consider now is: Gibraltar: the gateway to the U.K. – the world's fifth largest economy," Ashton said.