2015 is the 40th anniversary of the establishment of the first captive in Gibraltar. The territory has come a long way since then and today the Rock is home to a number of large and long-established captives, as Michael Ashton of Gibraltar Finance describes.
Over the past 40 years Gibraltar’s insurance industry has expanded and diversifi ed and there are currently almost 60 insurance companies writing new business with combined gross premium income in excess of £3.5 billion ($5.4 billion). The largest sector, motor insurance, has an approximate 16 percent share of the UK motor market. Around these insurers has grown a service industry of insurance managers, administrators and legal firms that have transformed the business profile of the promontory into a world-class centre for risk transfer.
Following more than a decade of planning by regulators, insurance companies in the EU will shortly be regulated under the new rules of Solvency II. While Solvency II remains a challenge for certain jurisdictions and insurance companies, for some well-placed EU jurisdictions there will undoubtedly be benefits.
What impact is Solvency II likely to have on the EU captive industry and what opportunities will it create for jurisdictions such as Gibraltar?
Any business wishing to establish a ‘traditional’ captive within the EU is likely to have to meet higher capital requirements under Solvency II in order to comply with the directive. There will probably be a number of captive owners across Europe questioning the need to retain their existing captives due to a need to commit further capital ahead of Solvency II.
It is not just capital requirements that captive owners are considering, but also the work that will be required to comply with Pillars II and III of the directive. It may be that the owners of captives of smaller businesses will be more likely to question the longer-term viability of retaining their captives.
"GIBRALTAR’S INSURANCE COMPANIES (SPECIAL PURPOSE VEHICLES) REGULATIONS 2009 TOGETHER WITH THE PCC ACT 2001 PREPARED THE GROUND FOR OBTAINING A FOOTHOLD IN THE ILS MARKET."
Historically, a major attraction of establishing a captive within the EU has been access to the whole EU market under the free movement of services provisions, even if regulatory capital has been higher than that required by European offshore jurisdictions. There appears to be interest from some captive owners or prospective owners to look in greater detail at establishing a cell within a protected cell company (PCC) as an alternative structure to retain some of the benefits previously provided by a captive. This could be an opportunity for Gibraltar to extend the scope and use of PCC cells, subject, as ever, to regulatory approval.
Guernsey was in 1997 the first jurisdiction to implement PCC legislation and was followed soon after by Gibraltar in 2001—the first EU jurisdiction to do so—and Gibraltar has been a leading domicile in this sphere ever since. Over the last 15 years many other jurisdictions around the world have established their own PCC legislation.
One of the primary reasons for introducing PCC legislation has been to encourage the growth of the captive industry by enabling different captive promoters to utilise a single corporate entity. This entity, through the creation of independent cells, enables the assets of different promoters to be segregated from one another with the clear intention that the assets of one particular cell are not available to meet the claims of creditors from other cells or the core.
Effects of Solvency II
The Solvency II directive does not specifically refer to PCCs but as the assets in an individual PCC cell are not available to meet claims arising from other cells they are covered under the ‘ring-fenced funds’ concept of Solvency II. The assets of ring-fenced funds are not available to cover risks that are outside the ring-fenced fund. In this way each PCC cell constitutes a separate ring-fenced fund.
The standard formula for the Solvency Capital Requirement (SCR) requires the calculation of a notional SCR for each cell. There is no requirement for each cell to hold sufficient own funds to meet the notional SCR from that cell. Excess own funds within an individual cell are not available to meet the SCR from any other cell or from the core. In addition, the Minimum Capital Requirement (MCR) is calculated for the PCC as a whole and there is no requirement for the MCR to be met at a cell level.
Another important feature of the captive market that is expected to change after the introduction of Solvency II is the use of loan-backs of capital. Many captives under the current rules have benefited from certain exemptions for loan-backs of capital to the parent company but it looks increasingly likely that such loans will be less prevalent under Solvency II. Captive owners might then question the suitability of retaining their captive structure over the long term and this could also trigger the possibility of using an alternative PCC structure.
Gibraltar’s position within the single European market gives it a strong proposition as a jurisdiction of choice for establishing an EU PCC with the ability to write throughout the EU from a well-regulated domicile with a low tax base. It is the ability to innovate within the rules that distinguishes the Rock from many of its competitors. A number of changes are being considered to the PCC legislation that it is hoped will act as a catalyst for new opportunities, thereby attracting new applicants and more insurance business to Gibraltar.
The introduction of Solvency II may create greater opportunities for structuring insurance-linked securities (ILS) onshore within the EU. Gibraltar’s Insurance Companies (Special Purpose Vehicles) Regulations 2009 together with the PCC Act 2001 prepared the ground for obtaining a foothold in the ILS market and making Gibraltar’s legal framework attractive for the use of special purpose vehicles and PCCs for ILS transactions.
Gibraltar offers a number of advantages such as speed to market, a pragmatic yet robust approach to regulation, a central European time zone and easy access from major centres of European insurance.
In April 2015 Gibraltar announced its first ILS transaction in a deal worth €100 million ($112 million). International lottery provider Lottoland completed the transaction in order to insure itself against major customer wins. This transaction provides an initial platform for the ILS market to expand from Gibraltar with the expectation of other ILS structures such as catastrophe bonds to follow.
Michael Ashton is a senior executive at Gibraltar Finance. He can be contacted at: firstname.lastname@example.org
Michael Ashton, Gilbraltar Finance, Europe