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Why Choose Gibraltar? In mid June 1997, The UK Government approved the Financial Services Commission (FSC) in Gibraltar as a competent authority within the European Union, in terms of granting European-wide licences to transact insurance business. In so doing, they opened a whole new chapter for Gibraltar as an insurance centre and opened up possibilities for the whole of Gibraltar's finance centre, including banking and investment services sectors. With an autonomous regulator able to grant European licences, Gibraltar is able to compete with the likes of Dublin and Guernsey as an insurance domicile of choice, and combines the advantages of European writing, tailor-made and accessible regulation, low taxation, and competitive cost base as other domiciles cannot. How then will passporting work from Gibraltar and what mechanisms are in place to facilitate it? First we should examine what we mean by passporting. With the Third Insurance Directive integrated into Gibraltar law, and a regulatory authority approved as a competent European authority, a Gibraltar insurer has the facility to do business in another European state in one of two ways:
To provide insurance in another EU state under FOS, the Gibraltar insurer must supply brief details to the FSC, and again, provided the Gibraltar Commissioner of Insurance is satisfied, a notification/certification procedure is followed. In this case, however, there is no necessity for the host state to reply or for the insurer to delay two months before commencing business. Once the FSC advises the insurer that it has notified the host state regulator, the insurer can begin to write insurance business. Again, it is the Gibraltar insurer's responsibility to ensure legal requirements in the host state are complied with. In both cases, certain items of information have to be provided in accordance with Schedule 14 of the Insurance Companies Ordinance 1987, which forms the Annex to Insurance Guidance Note No. 10, issued by the FSC in June of this year (see “Passporting to other EEA States”). This Schedule also lays down time limits within which the Commissioner is obliged to provide notice to the host state regulator (or indeed advise the insurer why he is not satisfied with their application). In the case of FOS, the Commissioner must reply to the insurer within one month of receiving the insurer's notice, either that he has submitted notification to the host state, or that he refuses the application. The decision between the two options of Freedom of Services and Establishment will very much depend on the type of operation being envisaged, and the extent to which the project involves work being done in the host state (where the risks are based). For example, a motor underwriter with substantial sales and claims handling infrastructure in the host state would be better advised to go down the Establishment (branch) route, whilst the methodology most likely to be chosen by a captive or insurer would be Freedom of Services. The tests laid down in the EU communication of February 2000 to determine if an host state intermediary operation acting on behalf of an insurer in another EU territory should be considered a branch are threefold:
If the answer to all three questions is yes, then the intermediary is considered a branch, and should therefore be trading under Establishment, not Freedom of Services. The company’s proposed structure should be analysed and possibly adapted to which of the two methodologies is most appropriate for the particular project. A few insurers, especially captives, with risks situated outside the territory where they are based still risk issuing non- admitted insurances, similar to practices in the UK Home Foreign market 15 or 20 years ago. This can present difficulties in a modern Europe, and the vast majority now use fronting arrangements, with reinsurance to an offshore insurer. Fronting has the disadvantage of cost (in terms of fronting fees paid to the local insurer) and also often the fronting insurer will insist or be obliged by local market conditions to retain a small element of the risk. This means that the fronter must accept risks and pay claims on the same basis as the reinsurance captive, and implies a reduction in the income to the captive. Other issues can also arise which may complicate administration, such as the necessity for acceptance by the fronter of the captive's financial strength, possibly resulting in the captive having to provide letters of credit or other guarantees. Documentation issues also become more complex, in ensuring that the primary policy issued by the fronter is fully covered by the captive's reinsurance, and there are no gaps in cover either due to policy wordings or indeed differences in legal practice between territories. All of these areas can be simplified by the captive providing insurance directly for the risks outside it's territory, in other words acting as a cross-border insurer under Freedom of Services. Clearly there are advantages in having a local representative in the territory where the risk is based, especially in terms of claims service, however the Third Party Claims Administrators are now prevalent in Europe and can be a cost-effective alternative, enabling an insurer to write Europe-wide risks direct. Up to now this has only been possible from Dublin and theoretically from Luxembourg, though tax deferral benefits in the latter only apply to reinsurance companies, and the base tax rate is high. Whilst double tax treaties exist in Dublin, and its tax rate is relatively low, at 12½%, nevertheless Dublin's cost base is also relatively high, compared with other domiciles, partly due to its employment quota requirements, and the Dublin regulator is recognised as not being as easily accessible and flexible as in other domiciles. Gibraltar therefore comes to the table offering a combination of benefits which are not available anywhere else: credible yet accessible regulation, a low tax regime, a competitive management cost base, a developed infrastructure, and most importantly access to the single European market. In addition, Gibraltar has the advantage of being a mature finance centre in other areas, and therefore having a range of other benefits and opportunities that may complement an insurance operation. Gibraltar can offer:
For further information, please contact: Chris Johnson ACII
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