Since the market hardening at the beginning of the noughties, Gibraltar has seen a substantial and rapid influx of insurance companies established in Gibraltar, increasing the number of licensed entities from no more than a dozen to over 60 by the end of 2009. A significant marker is that the Gibraltar motor insurance industry is now a larger proportion of the UK motor market than is Lloyd’s of London.

Gibraltar already had some indigenous Open Market Insurers, most notably Argus Insurance Company (Europe) Limited, which arose from the sale to the Argus Group in 2005 of the local Norwich Union company, which had been originally established in 1984 by the Savignon family to serve the insurance needs of the local community. Growth in Gibraltar’s insurance market came from insurers whose client bases were outside Gibraltar, and principally in the UK.

Why have insurers come to Gibraltar?

The reasons for this growth are several, but certainly all stem from the accession of Gibraltar to the single European market at the end of the 1990s.

The principal driver for the establishment of companies like Admiral, Zenith, Markerstudy to name but a few, was the ever-increasing weight of regulation in other domiciles, compared to the no less stringent, but much more accessible and human approach to regulation displayed by the Gibraltar Financial Services Commission. This, allied to the developing service provider infrastructure, relatively low costs of operation, favourable fiscal regime and of course the ability for Gibraltar insurers to passport their services into other European territories, made Gibraltar a logical and attractive choice for the shareholders of those companies.

Many of the new entrants focused on the UK motor sector, some decamping from the over-regulated Lloyds market, others from the company market in the UK. Some focused on niche motor products, for example taxi risks, where the traditional market had withdrawn many lines of cover in a scenario where rates and terms were rising; others were based on more mainstream portfolios, but keen to maximise capital usage and take advantage of the more agile regulatory and professional response they experienced on the Rock. However this was not the whole story. A number of other specialised non-motor insurers were established, writing for example legal expenses risks, casualty and liability portfolios, as well as contingency and financial product risk.

How do Open Market Insurers carry on their business?

Open Market Insurers, or OMIs as they are commonly referred to, will establish their head office in Gibraltar, and maintain a management and underwriting staff at a high level in Gibraltar. All high level underwriting decisions will be taken here, and certainly any corporate and significant contractual decisions. If their client base is high volume, the OMI’s route to market will usually be by a service company in the clients’ territory, and claims would also be handled by a third party company, which could be the same as the service company.

An OMI’s passporting strategy will depend on what level of decision-making is delegated to the intermediaries who cede business to the OMI from the target territory, as well as the ownership/control of those intermediaries.

The two concepts under which insurance business can be written are Freedom of Services, where a risk in one state is written in another in a pure cross-border transaction, and Establishment, where a branch of the insurer is established.

In an InterpretatiWWI memorial at sunsetve Communication issued by the EC in February 2000, it was clarified that, for a third party operation ceding business to an insurance undertaking to be considered a branch of that undertaking, three criteria had to be cumulatively fulfilled:

  1. the third party must be subject to the direction and control of the undertaking
  2. the third party must be able to commit the undertaking (i.e. bind risks or decide and settle claims)
  3. the third party must have received a permanent brief.
    Note that fulfilling any one or two of these is not sufficient – all three must be fulfilled for a branch situation to exist.

There are tax implications to having a third party considered a branch, as the results of the portfolio of business would be subject to tax in the territory where the third party resides, rather than the undertaking, however most operations tend to one methodology or the other depending on what suits their operational structure best, rather than deciding on a route and then trying to make the structure fit!

None of this, of course impinges on the Gibraltar GFSC’s requirement for mind and management to be firmly vested in the Gibraltar entity. The majority of board meetings will be held in Gibraltar, and it is normal for companies to have one or more locally resident non-executive directors. Books and records must be held in Gibraltar, and financial and company secretarial work is usually carried out either by local staff or by a licensed Insurance Manager.

What does the future hold?

Many commentators believe that, now the issues over corporation tax that have created a degree of uncertainty over the last 5 years are drawing to a close (with the onset of a low 10% tax rate effective 1 July 2010), Gibraltar is about to enter another golden period. It is interesting that one of the drivers that led to a very rapid increase in insurer formation on the Rock at the beginning of the noughties was the hardening of the UK market, and it seems that cycle is starting again in the “tens”.

In terms of tax certainty, and now a much more developed and experienced insurance sector, Gib is better placed than ever to become a home for Open Market insurance companies.