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 that 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 6 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.

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