Written by EC3 Legal Senior Partner David Coupe
Whilst around 27% of the UK motor risks are underwritten by Gibraltar insurers, the MGA market has not seen much growth in recent years. With the recent proposed legislative changes of the intermediated market in Gibraltar being announced, could a new dawn be rising which will be exciting for the Gibraltar insurance market and in particular the MGA market?
Why consider Gibraltar now
As BREXIT occurs, the opportunities in the UK increase. Both governments have announced the continuation of a single market between Gibraltar and the UK in respect of financial services, which means there is a guaranteed access to the UK market for Gibraltar regulated entities, and vice versa
There are many existing positives for Gibraltar. There are new significant legislative reforms to provide a sound base across all financial services, aiming to be comparable to that of the UK. It has an established insurance sector with many experienced professionals who know the UK market well. There is a favourable tax regime with no VAT. It also has a well-developed regulator (the Gibraltar Financial Services Commission) offering “right touch” not “light touch” regulation.
And with a new insurance intermediary regime as announced, there should be much to like.
The regulation of insurance both in the UK and Gibraltar has been (and is likely to remain to a greater extent) influenced by EU rules. Solvency II and the IDD were introduced to prevent systemic failure in the insurance industry across the EU, and to ensure consumer protection. As a result, the supervision of insurance activities can be challenging, not only for the regulators, but for those being regulated.
The UK offers a slow and sometimes rigid regulatory regime as regards the setting up and on-going supervision of these businesses. For instance, applying for UK regulated intermediary status can typically be an 8 month process, often full of questions that have little benefit to the process, and cause immense frustration to the applicant. Indeed, because the UK insurance market changes so quickly, by the time the business is regulated, it often needs a whole new business plan since the original opportunity is no longer there. Sometimes funding evaporates in the meantime.
The same applies to a large number of on-going conduct enquiries where one has no direct reporting line, lack of continuity of approach, and often slow unhelpful responses. To be fair to the UK regulators, they have a vast number of diverse businesses to regulate, and the ability to offer a “bespoke” service is nigh on impossible for all of them.
Could Gibraltar offer a speedier and better solution in terms of regulation, in particular to SME intermediaries operating in the UK market? Should those entities in the intermediated market be subjected to same cumbersome regulatory regime as larger players, where they neither carry insurance risks for their own account, nor where they are not end user/consumer facing?
Due to its size, Gibraltar has often prided itself as being nimble in terms of its adaptability to changing market conditions. Its regulator (GFSC) has a “speed to market” policy, and is known for being approachable on short notice. This makes it a responsive regulator and should tick the boxes of UK businesses.
The Future for Gibraltar
Gibraltar Finance has announced major changes are to occur in the intermediated insurance market. Gibraltar insurance companies often operate on an outsourced business model where most of their operations are outsourced to insurance managers. These managers have not previously been able to manage intermediaries. This will now be possible. An appointed representative (AR) regime will also be introduced to allow insurance intermediaries to be AR’s of “hub” intermediaries like those operating the UK – but this is likely to be restricted to those whose primary business is insurance (to stop e.g. 2nd hand car dealers being AR’s).
On licensing, the MGAs and brokers are currently licensed and regulated under the same Financial Services (Investment and Fiduciary Services) Act 1989. There is a hope that they will be regulated separately.
Firstly, to do this, there is a need to look at what should be defined as an MGA. It is suggested that this should be an agent whose sole contractual duty is to the insurer (although this will inevitably cut out “retail” MGAs also dealing directly with consumers). An MGA’s clients are its producing brokers which are already licensed and regulated. As such, why do such MGAs need to be licensed under the same licensing regime when they are only dealing with professional regulated entities? It is an unnecessary duplication, increasing regulatory burden and cost, and ultimately delivering little benefit.
By contrast, brokers are consumer/end user facing and, as such, their regulation should be different from that of MGAs since they owe a higher duty of care than an MGA. The same applies to “retail” MGAs too. A more prescriptive regulatory regime, perhaps with a higher compensation levy for those dealing with consumers is surely correct?
MGAs that have no direct contact with consumers/insureds should not be regulated as brokers, nor carry the same duty of care to consumers with whom they are often allowed no direct contact by the introducing brokers. UK regulation does not provide this distinction – and the FCA will not regulate them separately (despite other countries such as Belgium doing so). If Gibraltar were to provide this distinction, it could attract a large amount of interest from UK MGAs, since the market has grown enormously. This is reflected by the fact that the UK Managing General Agents’ Association (MGAA) had 30 members writing £1.2bn when it set up in 2012. It now has some 140 members writing £6.3bn, of which only about 12% is “retail” (i.e. directly sold) to the consumer. The model is continually growing, as it has done in the USA.
Many MGAs are operating through an incubator model (where they are AR’s of a hub regulated intermediary). They would dearly all like to be autonomous. However, the cost and complexity of UK regulation is prohibitive. Gibraltar needs to offer something better – not soft, not easy, just being more responsive and giving easier access to regulation and services.
The writer has been heavily involved in the development of the UK MGA market and acts for some 250 UK intermediary businesses. He has also been involved in this initiative. Within 2 weeks of the above change being announced, he had been approached by no less than 7 intermediaries and 4 incubators interested in setting up in Gibraltar. The new laws will apparently be a short while in coming through, whilst the new financial services legislation beds down from January 2020. We await the exact wording of the new laws with eager anticipation.
The Gibraltar Government has backed this initiative. The laws will be changed. The tax environment is stable. The skill set is there. Watch this space; and be ready to seize the moment!
With special thanks to Yvonne Chu Partner at Hassans International Law Firm for her technical input on this Article.