Gable liquidation ‘tip of iceberg’ as smaller insurers grapple with Solvency II

When Gable Insurance went into administration, its chief executive blamed, in part, the pressures of Solvency II compliance. But experts are now warning that Gable could become the tip of the iceberg as many other smaller insurers in Europe struggle with the onerous demands of the new regime – and it will only be a matter of time before more casualties follow.

“Smaller, unrated and less well capitalised insurers must be having sleepless nights wondering whether they can survive in this new super-regulated environment,” says Richard Brown, director at VIPR, a software solutions provider for the insurance market, summing up the concerns experts are expressing for smaller companies.

Liechtenstein-based Gable Insurance went into liquidation in November 2016. The move followed a formal order issued to Gable on Sept. 7 by the Liechtenstein Financial Market Authority (FMA) to stop writing insurance over concerns over Gable’s financial position. Gable was then placed into Special Administration by the FMA on 10 October 2016 to protect the interests of policyholders.

Commenting on the process, Gable owner William Dewsall said that Solvency II obligations had proved “impossible” to comply with. "The Gable Group has for some time been trying to meet the onerous obligations of the Solvency II regime. Unfortunately, it has proved impossible to do so."

Gable, founded in 2006, was set up as a European non-life insurer, underwriting a range of specialist policies for the commercial sectors in the UK, Denmark, France, Germany, Ireland, Italy, the Netherlands, Norway, Spain and Sweden. Its products included motor, property and workers’ compensation.

Some market observers have suggested that Gable became a victim of the way in which Solvency II penalises younger companies without the track record of proven underwriting profitability.

“The business appeared to have some interesting niche products across a wide number of geographies in Europe,” an analyst who preferred to remain unnamed, told Intelligent Insurer.

“As with any growing, young insurance business, it takes a long time until their underwriting record becomes seasoned,” he explained. He believes that Gable has not been able to take credit for its underwriting record in the Solvency II regime.

“They seemed to end up with a capital requirement that the business wasn’t set up to achieve in time,” he said.

Solvency II rules became effective in all 28 EU member states in January 2016, introducing a new, harmonised EU-wide insurance regulatory regime. It includes a “Supervisory Review Process” which shifted the supervisors’ focus from compliance monitoring and capital to evaluating insurers’ risk profiles and the quality of their risk management and governance systems.

“Solvency II has certainly been a challenge for the entire industry, but there is an argument that it has been a bigger challenge for smaller companies because you need to spend millions and millions to adapt to this new regulatory system,” said Antonello Aquino, associate managing director at Moody’s.

Part of the challenge for smaller companies to adapt to the Solvency II regime is to adapt their products, including for example capital light products, Aquino said. Smaller carriers might lack the expertise and know how required to write such hybrid products.

But for Gable, in addition to the burden from Solvency II, the new regime also came at a difficult time for the company.

“Solvency II requirements came quite shortly after a bad set of losses for Gable,” the analyst said.

For 2015, Gable group reported a loss attributable to shareholders of £24.2 million, an increase from a loss of £4.8 million in 2014. Gross written premiums expanded to £91.1 million from £80.0 million over the period. Net claims, however, grew to £50.2 million from £35.4 million.

“They had some quite large insurance claims that caused poor operating results, so that wasn’t ideal either,” the analyst said.

But some market observers have suggested that the problems at Gable could be the tip of the iceberg warning that other smaller players could also struggle with the new regime and there could be further casualties.

Brown at VIPR, added that there is no doubt in his mind that Solvency II is placing a huge pressure on the insurance market, both from a reporting and capital adequacy point of view.

“The burden imposed on insurers to understand and quantify their potential liabilities is huge and will certainly keep a small army of actuaries busy for many years to come,” he said.

“Getting this wrong could have a massive impact on the amount of capital insurers will need to carry and potentially put their whole survival at risk.”

He added that with Solvency II Pillar 3 coming into full force on January 1, 2017 insurers are now grappling with the thorny issue of reporting.  Pillar 3 is all about reporting and disclosure and places an obligation on the market to publish details of the risks facing them, capital adequacy and risk management, he explained.

“For many large insurers with multiple legacy software systems brought together as a result of numerous mergers and acquisitions, this certainly poses challenges. How do you get all that information collated in one location to enable you to properly report with a degree of certainty and accuracy?” he asked.

He noted that the problem is magnified in the area of delegated authorities due to the fact that coverholder/MGA reporting has for many years been at best sporadic and at worst non-existent.  “Even when the correct amount of information is being provided, it is seldom in a consistent format, meaning that the data then needs to be cleansed, validated and standardised by the recipient,” he said.

He warned: “The message to those who are still grappling with this problem, is to take action now before the regulators do it for you. Time is rapidly running out and with severe financial penalties for non-compliance and further sanctions for continued breaches, it’s an issue that has to be resolved without delay.”