As an EU domicile, reinsurers can locate in Gibraltar and write business anywhere in Europe. Nigel Feetham explains how this has contributed to its popularity.
The insurance sector has been the largest growth area of the Gibraltar financial services industry in recent years. The number of insurance companies setting up in Gibraltar has grown from 13 in 2000 to 63 today, while the volume of premiums currently stands at around £2bn. Gibraltar insurers service a significant part of the UK motor insurance market, which on its own is larger than Lloyd’s of London.
There are several characteristics of the jurisdiction that have attracted insurers in recent years. When Gibraltar opened the door to insurance passporting in 1997 and obtained practical recognition of those rights in 1999, insurers (including a number of household names) began to see the potential. Under passporting rights, a company licensed in Gibraltar can operate throughout the European Union.
More recently – with the implementation of the Reinsurance Directive, bringing its own passport regime – there has been increased interest from reinsurance companies seeking to establish locally. The first re-domiciliation of a reinsurance company from outside the European Union into the European Union happened in Gibraltar in 2005.
The Reinsurance Directive has introduced, for the first time, a harmonised regulatory regime for pure reinsurers (including captive reinsurers) across the European Union. Under this regime, a reinsurer that has its head office in Gibraltar is able to write cross-border business anywhere in the EU, either on a branch or provision of services basis.
The initial growth in the Gibraltar insurance industry came from the UK broker community. Gibraltar has become known for its “virtual insurers”, that is, the brokers do everything associated with the pricing and sale of insurance, except take on the underwriting risk – setting up their own Gibraltar “underwriter” to do this. Inevitably, as the insurance industry in the UK itself evolved in 2005 and 2006, through a spate of acquisitions by insurers of brokers (primarily UK insurers buying into distribution channels) and private equity deals, Gibraltar-based businesses were involved in some of these deals.
The synergies between the Gibraltar and UK insurance market were there clear from the beginning. UK companies with Gibraltar insurers can gain access to the UK and EU markets via the passport regime and work with legal, political and administrative systems with which they are also familiar. There are no language barriers and the Gibraltar lawyers, accountants, banking and other professionals operate more or less like they do at home.
Among the ingredients that have contributed to Gibraltar’s growth as a financial centre is its approach to regulation. A jurisdiction can have sound reputation, a good legislative regime, excellent telecommunications, and reliable professional infrastructure, but without responsive regulators attuned to the needs of business the recipe will not be complete.
With a new tax system expected to be in place as from the 1 July 2010, Gibraltar is also expected to become an attractive domicile for insurance and reinsurance groups with primary listings in the London Stock Exchange or AIM.
The number of captives being set up in Gibraltar has also grown steadily. Gibraltar was the first EU jurisdiction to implement protected cell company (PCC) legislation. There have so far been six insurance protected cell companies in Gibraltar within the legislative regime and two “contractual cell” companies, supported by contractual arrangements between the various parties.
At present many of these companies have fronting arrangements, whilst reinsuring outside the EU.
The 1980s and 1990s saw many reinsurance captives being set up outside the European Union (such as in the Channel Islands), with fronting arrangements within the European Union. Such arrangements were costly and also had to be supported by letters of credit. Today, taking advantage of the European passport, a Guernsey insurance captive, could, for example, re-domicile to Gibraltar, as the same legal entity, underwriting the existing book of business, direct into the EU, and thereby removing the need for fronting.
Nigel Feetham is a partner in the financial services and banking department of Hassans.