Insurance Jottings
Gibraltar insurers to lose passporting rights
The UK’s decision to leave the EU creates some uncertainty for Gibraltar-domiciled insurers, AM Best has warned in a report.
Gibraltar is a member of the EU by virtue of UK membership, and when this is relinquished by the UK, it will also lose any benefits of EU membership, such as passporting rights, the agency said.
However, with almost 90 percent of business coming from the UK, AM Best expects companies to be largely unaffected by the loss of EU passporting rights.
That said, those companies which do write business in the other 27 EU countries will have to make contingency plans or cease to underwrite this business, the agency warned.
Gibraltar’s insurance market has experienced significant development over the past decade, with new entrants contributing to growth in the territory’s premium base, AM Best noted.
There are now approximately 60 insurers registered in Gibraltar, who together generate premium revenue of around £4 billion. They operate primarily in the UK’s competitive motor market and account for approximately six percent of the overall UK non-life market, based on gross written premiums (GWP).
Insurers have been attracted to the British overseas territory by the ability to write cross-border business into the UK and other EU countries, as well as a favourable taxation system, AM Best noted.
The corporate tax rate and income tax rate are lower than the UK, in addition no VAT is due on goods or services based in Gibraltar.
Whilst Insurance Premium Tax (IPT) is not payable on risks situated in Gibraltar, AM Best notes that coverage provided to policyholders based in the EU customs union would incur IPT, assuming the service is consumed within that jurisdiction.
AM Best observed that overall earnings for Gibraltarian insurers are good and the market has consistently generated a return on equity (ROE) in the high single digits, helped by a relatively high level of underwriting leverage. Earnings have been supplemented by other income and modest investment returns, the agency said.
With the UK motor market subject to fierce competition, Gibraltar-domiciled insurers have found themselves exposed to significant pricing pressure in recent years, AM Best noted.
They have also had to contend with the consequences of the significant cut in the discount rate used to calculate lump-sum personal injury compensation from 2.5 percent to minus 0.75 percent, announced by the UK government in February 2017.
The rate change had a material impact on the market in Gibraltar due to its bias towards motor business, with many companies taking the associated one-off reserve hit in their 2016 results. However, the extensive use of reinsurance by the market, typically in the form of excess of loss cover, partly mitigated the impact on earnings and balance sheets.
The industry’s non-life combined ratio has hovered around 100 percent in most years, which would normally suggest that companies are struggling to generate an underwriting profit.
However, results have historically been supported by “other underwriting” income, AM Best explained.
Strategies across the market vary, but overall insurers appear to be pricing policies at around breakeven, with ancillary income or other underwriting income (which relates to additional administration or service fees) contributing to overall earnings, the agency said.
SCOR gets green light for new P&C specialty firm
Reinsurer SCOR has received the French supervisory authority’s approval for SCOR Europe SE, the new Paris-based P&C specialty insurance company it is creating to ensure business continuity post Brexit.
The licence will enable SCOR to operate within the European Economic Area (EEA) with effect from the 1st January 2019, and ensure the continuity of services offered to its insured clients in view of Brexit.
Starting next year, SCOR Europe will underwrite all new and renewed business relating to risks located in the EEA which can no longer be accepted by SCOR UK Company after the UK leaves the EU.
The new company will also take over all commitments from policies previously issued by SCOR UK Company if the latter can no longer honour these following Brexit. SCOR UK Company will continue to serve all its clients in the rest of the world.
Beazley, AEGIS lead the Lloyd’s electronic placement table
Beazley syndicate 3623 and Aegis syndicate 1225 are leading the ranking of electronic placement adoption at Lloyd’s, according to a new table published for the first time by the London Market Group.
Beazley syndicate 3623 (Beazley Furlonge) had an electronic placement adoption rate of 61 percent while Aegis syndicate 1225 (AEGIS Managing Agency) reached 60 percent.
They are followed by Allied World syndicate 2232 (Allied World Managing Agency) with 51 percent and Apollo syndicate 1969 (Apollo Syndicate Management) with 50 percent.
The Corporation of Lloyd’s had introduced a mandate for electronic placement in March 2018 requiring minimum targets for electronic placement of risks.
From the end of the second quarter this year, each syndicate was required to have written no less than ten percent of its risks electronically. This target rises by ten percent each quarter until the fourth quarter of 2018 to reach 30 percent. Further targets will be confirmed prior to the end of the period.
Louise Day, director of operations at the IUA (International Underwriting Association), commented: “The number of risks accepted via PPL (Placing Platform Limited) continues to grow across the company market with several firms doubling their trade on the platform since the previous quarter. IUA members comprise many different business models and processing arrangements, yet support for PPL is widespread with adoption rates matching those achieved by Lloyd’s managing agents.”
But there are also syndicates which missed the targets. Outgoing Lloyd’s CEO Inga Beale had said when introducing the electronic placement mandate in March 2018 that “those who fall short will be required to contribute towards the costs of modernising the market.”
The laggards in the adoption league for electronic placements are syndicate 2525 (Asta Managing Agency Limited) and Skuld syndicate 1897 (Asta Managing Agency Limited) both with a four percent electronic placement adoption rate. They are followed by China Re syndicate 2088 (Catlin Underwriting Agencies Limited) with nine percent and Novae syndicate 2007 (Axis Managing Agency Limited) with 13 percent.
Tokio Marine secures approval for Brexit plan
Tokio Marine Group is transferring its existing portfolio of policies written out of Continental European operations to its newly established subsidiary Tokio Marine Europe (TME) in Luxembourg in preparation for Brexit.
The group has received approval from the High Court of England and Wales to complete its Part VII transfer process.
“Gaining approval from the High Court is a major step in securing our Brexit plans,” said Thibaud Hervy, chief executive officer of TME.
“Regardless of the outcome that may result from the Brexit negotiations, TME will be able to ensure that all brokers and clients continue to receive the highest level of service.”
In May 2018, the company announced its plan to set up Tokio Marine Europe in Luxembourg for writing European business after the UK’s exit from the European Union.
Most insurers on track in Brexit preparations: AM Best
The majority of insurance groups which are affected by Brexit and rated by AM Best have either completed or initiated a transfer of their European Economic Area (EEA) business from their UK insurer to an affiliated EEA insurer under Part VII of the Financial Services and Markets Act 2000, according to the agency.
“Many companies have chosen to establish new EU subsidiaries,” said Catherine Thomas, senior director, analytics at AM Best.
“Meanwhile, small insurers that do not have the resources to create additional companies have formed relationships with local carriers that will be able to front business for them. AM Best expects rated insurance groups affected by Brexit to have these subsidiaries or arrangements in place by March 2019, ensuring that they are able to underwrite EEA business going forward, even in the absence of a transition period.”
When the UK withdraws from the EU, and at the end of any transition period, passporting rights that currently exist between the UK and the EEA are expected to cease.
“The Part VII transfer process is expensive and time consuming, with transfers subject to extensive regulatory scrutiny and court approval,” said Yvette Essen, director of research at AM Best.
“The process is further complicated if business has been underwritten on a pan-European basis, as is often the case for large commercial clients, as it is difficult to separate assets and liabilities into UK and other EEA components. Consequently, a number of Part VII transfers will not be complete by the end of March 2019. In these cases, a transition period following the UK’s withdrawal from the EU is necessary to allow time for the transfer of policies to be completed.”
Once passporting rights are lost, UK-domiciled insurers will no longer be able to issue insurance contracts in the EEA. It is also possible that, in the absence of a political solution, they will not be able to service existing EEA contracts by settling and paying claims, AM Best said. In the event of a “no-deal” Brexit, this could come into effect as early as the 29th March 2019.
AM Best warned that the creation of a licensed EU subsidiary or affiliate does not address the issue that a UK insurer may not be able to service existing EEA contracts following a loss of passporting rights. It is the hope and expectation of the insurance market that a political solution will be found to this problem; for example, by allowing grandfathering of existing contracts, the agency noted. In spite of this, affected insurers are putting contingency plans in place and exploring their operational and legal ability to settle claims and provide other services to policyholders in individual EEA jurisdictions, it added.
(Article dated the 19th November)
RSA restructures London market business, exits three lines as profits slump
RSA Insurance Group has revealed its plans to scale back London Market exposures and restructure its specialty and wholesale business following a strategic review of all of its portfolios.
The insurer has concluded that its international construction, international freight and fixed price marine protection and indemnity insurance business lines are unlikely to satisfy the group’s profitability requirements in the foreseeable future. Hence, RSA is exiting these lines of business with immediate effect or at contract expiry.
RSA’s London Market business, reported as part of RSA’s UK and International region, will now focus on four key specialisms, including international hull; international cargo and transportation; international property; and international engineering and renewable energy risks.
RSA said these core portfolios, whilst subject to rigorous and selective underwriting, will allow it to concentrate on areas of existing strength and establish a platform for profitable growth in the future.
The changes are part of an ongoing review to streamline the group’s international exposure, improving underwriting, pricing accuracy and risk management.
RSA’s London Market portfolios in international marine cargo and international marine transportation will be restructured into one unit under new leadership, with exposures in both areas significantly reducing as the company focuses on targeted areas where sustained profitability can be achieved.
According to the insurer, these actions are expected to reduce premiums written through the London Market by RSA by around one third year on year (2018 vs 2019).
Brexit deal’s focus on equivalence ‘unfortunate’ for insurers and brokers
The chief executive of the London and International Insurance Brokers’ Association (LIIBA) has voiced concerns that the draft Brexit agreement reached by the UK and European Union does not address or resolve the body’s fundamental concern: a lack of clarity around the Insurance Distribution Directive (IDD) which could jeopardise the ability of brokers to operate in Europe.
Christopher Croft, chief executive of LIIBA, said: “While it is encouraging to see a dedicated section on financial services, we have to hope that the fact the draft is solely built around the concept of ‘equivalence’ is for the sake of brevity and simplicity. Otherwise, those of us who have no equivalence regime have cause for serious concern. As do our clients.
“The current European legislation covering insurance brokers – Insurance Distribution Directive – has no concept of equivalence or the market access rights it might grant. Without this it is unclear what the agreement published yesterday would mean for our sector.”
Speaking at a joint LIIBA-Lloyd’s Brexit seminar, Mr Croft stressed that the lack of clarity around the IDD meant that, to date, no European Union regulator had confirmed a belief that a wholesale broking model would be acceptable.
Mr Croft said: “Most regulators are expecting EIOPA to provide clarity for brokers but our understanding is that EIOPA does not intend to so. This is because the scope of IDD is a matter for the European Commission. However, the Commission is unlikely to do anything which could be seen to be prejudicing the negotiations.”
Meanwhile, other commentators have noted that the focus on equivalence is not necessarily helpful because equivalence under Solvency II does not grant market access for insurance business. But they also note that a solution may be possible for reinsurers.
Bob Haken, insurance partner at Norton Rose Fulbright, said: “What the Political Declaration does say about financial services in general is that there will be commitments to ‘preserving financial stability, market integrity, investor protection and fair competition, while respecting the (UK’s and the EU’s) regulatory and decision-making autonomy, and their ability to take equivalence decisions in their own interest’.
“This focus on equivalence is unfortunate for the insurance industry as, unlike some other financial services, equivalence under Solvency II does not grant market access for insurance business (reinsurance is treated differently under Article 172 of the Solvency Directive pursuant to which equivalence does come with market access).
“At present, therefore, it seems unlikely that the Withdrawal Agreement or Political Declaration will preserve passporting rights for UK insurers.
“For reinsurance, there is a glimmer of hope in that there is a commitment to reaching equivalence decisions as soon as possible after the 29th March 2019, endeavouring to conclude those assessments by the 30th June 2020.
“However, in a missed opportunity, neither document recognises the important issue of contract continuity following the expiry of the transitional period, meaning that the contingency plans that many hoped would be unnecessary will have to be deployed by the end of 2020.”
Article dated the 15th November 2018