The EU's new regulations will be more of a challence in the territory, as insurers tend to hold less capital than firms in UK

The performance of motor insurers in Gibraltar has been better than their UK counterparts of late, but they face big changes as Solvency II draws nearer.

While the net operating ratio of the UK motor market hovers around 120%, most insurers in Gibraltar are between 90% and 110%.

There are three reasons for this:

• Gibraltar is a cheap territory in which to set up, with no taxes on investment income;

• many Gibraltarian insurers target niche products that are more profitable, such as taxis or haulage; and

• insurers have greater control of their broker partners (in some instances, such as Advantage and intermediary Hastings, they are sister companies).

It's not all rosy on the rock, however, as the Gibraltar market will have to make serious adaptations for Solvency II, which will require insurers to hold greater capital against their risks.

Capital requirements

Typically, Gibraltarian insurers hold less capital than their UK counterparts, meaning Solvency II is more of a problem.

Deloitte partner Ian Clark explains: "In the Solvency II world, those who suffer most will be the monoline insurers, because if you take the standard model, capital requirements will have to be typically higher.

"Gibraltar’s problem is ‘where is the capital going to come from?’ It could be new equity raisings, but that's difficult in a world where the industry has low margins."

Quota share

Clark believes another option is for insurers to return to managing general agencies (MGAs), where the risk is carried by the capital provider.

The final and most likely option is for reinsurance. Several reinsurers are understood to be entering Gibraltar to offer co-insurance, but also quota share and adverse development cover.

Clark says: "Reinsurance is an option, but it is difficult, if you are already a heavy user of reinsurance, to provide quota share capital. However, co-insurance is very likely."

It looks like Solvency II will be tough for the insurers in Gibraltar, but they do have a range of options. They’ll just need to get organised before the December 2012 deadline.