In answer to the last question of his excellent interview (4 December, Insurance Times), the chief executive of Halifax General Insurance is reported as saying that the Halifax brand "doesn't stand for trying to do some shoddy little financial deal out of Gibraltar to save you £4.50" and referring instead to "being regulated by the FSA, with the right amount of capital".
If the Gibraltar insurance sector has grabbed the financial headlines over the last 18 months it is because the regulatory climate in the UK is not keeping up with expectations within the market. This is no new phenomenon. The corporate sector has been taking advantage of arbitrage between markets for many years.
The financial markets have also over the last 30 years moved large amounts of capital offshore.
Moving their underwriting books to Gibraltar is now seen as a necessary step by many in the UK insurance industry to enable them to compete on level capital terms with others in the marketplace. Any suggestion, however, that Gibraltar insurers are undercapitalised would be a misinterpretation of the regulatory environment in Gibraltar and EU solvency requirements.
A less visible but rapidly growing global market is the use of special purpose vehicles set up in financial centres such as Luxembourg, Dublin and Gibraltar to issue investment paper tailored to different investor needs.
Inserting a special purpose vehicle into financial transactions is a tool used to take advantage of regulatory or credit arbitrage.
The special purpose vehicle is a capital efficient way of executing derivatives business.
The reality is that the possibilities for arbitrage in markets of all kinds will continue. Insurance is only one recent high profile sector. But in the case of a UK policyholder with Gibraltar insurance paper, he should be in no more risk than one that buys a policy in the UK. First, Gibraltar insurers selling into the UK should be covered by the UK compensation scheme.
Second, the credit risk of a Gibraltar insurer should also be determined by the quality of its investment management of underlying funds (for example, not relying inappropriately on one single class of asset) and this credit criteria applies to every other insurance company.
Third, a "brand" insurer is as conscious of its reputation whether it operates out of Gibraltar or out of London, since reputation after all is what makes the brand.
Nigel Feetham
Gibraltar
Nigel.feetham@hassans.gi
