Insurance Jottings

AM Best affirms ratings of Malaysia’s national oil company’s captive

Ratings agency AM Best has affirmed the Financial Strength Rating of A (Excellent) of Energas Insurance, the sole captive insurer of Petroliam Nasional Berhad, Malaysia’s national oil and gas company. The outlook of the ratings is stable.

 

AM Best said the ratings reflect Energas’ balance sheet strength, which it categorises as very strong, as well as its strong operating performance, neutral business profile and appropriate enterprise risk management.

 

The ratings also incorporate Energas’ solid risk-adjusted capitalisation, comprehensive reinsurance programme and historically strong operating performance, evidenced by a five-year average combined ratio of approximately 53 percent.

 

Partially offsetting these positive rating factors is a reduction in prospective earnings derived from smaller premium volumes as Petronas scales back on its upstream activates.

 

Nonetheless, AM Best expects Energas’ active cycle management and efficient cost structure to buffer some of the negative pressure on its combined ratio and to aid in keeping overall earnings positive.

 

Positive rating actions are unlikely in the near term. Negative rating actions may arise if there is material deterioration of Energas’ operating performance or risk-adjusted capitalisation in the event of repatriation of capital.

 

Luxembourg Aims to Attract More Insurers Seeking Post-Brexit Headquarters

Luxembourg is seeking to persuade at least two additional global insurers to make their post-Brexit home there after attracting American International Group Inc and Sompo International Holdings Ltd, the head of its financial lobbying group said.

 

“Contingency planning has started, but in September-October it will be crunch time,” Nicolas Mackel, the head of Luxembourg for Finance, said in an interview in Paris, without giving names of companies it is in talks with.

 

Staff flows from London in favour of Luxembourg are accelerating in areas such as money-management, he said, pointing to Citigroup Inc’s plans to make it a hub for its private banking business.

 

Luxembourg City, a venue for European funds, insurance companies and private banks, should win about 3,000 jobs by the end of 2018, Mr Mackel said. That is approximately on par with estimates for Paris.

 

Following the 2016 Brexit vote, ten global insurers have already picked Luxembourg as their new EU hub.

 

“Paris’s advantage is to be home of large players,” he said. Until now, “trading is rather going towards Frankfurt and wealth management towards Luxembourg.” While fund managers are generally building on their existing presence in the Grand Duchy or Dublin, he said.

 

Luxembourg can increase its financial workforce by seven percent from Brexit-related moves, Mr Mackel said.

 

AFL sets up marine division

Independent Lloyd’s broker AFL Insurance Brokers has launched a commercial marine division to be headed by Alex Mott, senior executive who previously managed the Ed/CGNB marine broking team as head broker.

 

“The launch of a commercial Marine division is a logical step for AFL as we continue to grow the business into a full-service intermediary,” said AFL chairman Toby Esser. “We are responding to increased demand from clients for a modern, proactive approach to processing and placing Marine business, and are delighted that a skilled insurance professional of Alex’s calibre is coming on board.”

 

The new director of marine Mott is a senior marine insurance professional with 16 years of international experience. His career as a Lloyd’s broker and broking team manager has seen him specialise in multiple marine risks, including hull and machinery, disbursements, war risks and P&I.

 

Hard Brexit Would Cost UK, EU Firms US$80 billion with UK Financial Services Worst Hit: Report

Companies in Britain and the European Union face an extra £58 billion (US$80 billion) in annual costs if there is a no-deal Brexit, with Britain’s vast financial sector set to be the worst-hit industry, according to a report on the 12th March.

 

Firms across the EU’s 27 countries other than Britain will have to pay £31 billion a year in tariff and non-tariff barriers if Britain leaves the bloc without a deal, the report by Oliver Wyman management consultants and law firm Clifford Chance said.

 

In return, British exporters to the EU will have to pay £27 billion pounds a year.

 

“These increased costs and uncertainty threaten to reduce profitability and pose existential threats to some businesses,” the report said.

 

The report, entitled “The Red Tape Cost of Brexit,” is available on Oliver Wyman’s website.

 

Britain is due to leave the EU next year after voting in favour of ending more than four decades of political, economic and legal ties with the world’s largest trading bloc.

 

In the absence of an agreement, trade between Britain and the other 27 EU members would default to World Trade Organisation rules and tariffs, a sharp contrast to the access the UK has enjoyed as a member of the EU’s single market.

 

Although Britain wants a deal, the government says it is preparing for any outcome, including the chance that Britain could crash out of the bloc without a deal. It has set aside £3 billion to prepare for all eventualities.

If Britain stays in a form of a customs union it would reduce the costs for both sides by about half, the report said.

 

However, Prime Minister Theresa May has ruled out keeping Britain in an EU customs union because she said it would prevent the country from striking its own trade deals with fast-growing economies such as China and India.

 

The report showed 70 percent of the extra costs in Britain from a no-deal Brexit would be shared by five industries: financial services, cars, agriculture and food and drink, consumer goods and chemicals and plastics.

 

Financial services firms in Britain would suffer the biggest hit because, unlike some automotive and aerospace firms which can switch to domestic suppliers of components, they will have to set up new operations in the EU to continue serving clients.

Goldman Sachs and UBS said last week they were starting to transfer some bankers to Frankfurt in preparation for Britain’s exit from the EU.

 

The Bank of England has warned that about 10,000 finance jobs may leave Britain by the end of next year because of Brexit.

 

However, top US investment banks are currently planning to hire far more people in London than anywhere else in Europe.

 

In the EU, the hardest hit sector would be the automotive sector, agriculture and food and drinks, chemicals and plastics, consumer goods and industrials, the report said.

 

Bellwood Prestbury accredited as Lloyd’s broker

Cheltenham-headquartered broker Bellwood Prestbury has achieved Lloyd’s broker status building on its coverholder status which it has held since 2010.

 

The company, which also has an office in London, has been providing high-risk insurance for companies and organisations for over 17 years.

 

Its client base includes multinationals with complex operations in multiple jurisdictions, NGOs working in war or disaster regions and smaller companies who bid for specific contracts in high-risk countries.

 

Managing director Peter Bellwood commented: “Companies, NGOs and other organisations come to us because they have operations in places like Iraq, Afghanistan or parts of Asia and Africa where standard insurance doesn’t apply.

 

“Being a Lloyd’s broker now gives us even more flexibility in creating specialist cover with proper protection for their people, assets and liabilities.”

 

He concluded: “For things like terrorist threats, political violence, remote medical emergencies, kidnap and ransom, equipment, building, fleet insurance or business liabilities, bespoke cover ensures clients can fully meet their contractual agreements.”

 

The continuing evolution of captive insurance

International financial centres such as Barbados must develop a niche strategy within the limitations of a new world order requiring more onerous governance and regulation, as Ricardo Knight & Kirk Cyrus of JLT Barbados explained.

 

A captive, like every insurer, benefits from diversification of its portfolio, but operates more efficiently than the insurance market for primary risk layers. These are the low severity, medium-to-high frequency losses, with typical savings as much as 25 percent, depending on the type of risk.

 

“Barbados is recognised by the United Nations as one of the top developing nations in the world, with a reputation for its integrity as an international financial centre.”

 

It is now commonplace for captives to participate in varied global programmes and lines, including property, damage and non-damage business interruption; recall, products and general liability; environmental impairment; marine cargo and inland transit; automobile and personal damage; trade credit; and employee benefits including life, disability and medical. Two emerging risks are discussed below.

 

Cyber

While cyber coverage is growing in complexity and capacity, most companies’ principal needs for cyber coverage are more likely to be based upon loss of intellectual property (IP) and reputational loss/damage arising from IP or sensitive data, than notification-based coverage.

 

A captive can facilitate a tailored design of risk transfer coverage for a company, which can then be formalised through a policy form and placed in a captive to develop loss experience, to support a commercial underwriter’s participation in the coverage in future years.

 

Brand damage and reputation

Responsibility for protection of brand reputation rests with the corporate board, including mitigation through insurance. The role of insurance in the process will depend on how management views reputational risk. The task is designing a programme which closely fits the identified risks, but it may be possible to transfer separate aspects of the risk across different insurance products, including cyber, property damage, business interruption, errors and omissions, etc.

 

The key to development in this area is the extent to which this risk is integrated into existing risk management arrangements or business lines.

 

Captive domicile

The recommendation from the industry will always be to establish the captive in an international financial centre, such as Barbados, which allows maximum flexibility for business development, while minimising ongoing costs.

 

In recent years, there has been consideration of US ‘onshore’ domiciles and those in the EU such as Ireland, Luxembourg and Malta. Outside the US, captive growth has been evidenced in Bermuda and the Caribbean, while business activity in Guernsey for non-EU domiciles has continued at a steady pace. The main advantage of EU jurisdictions has been the ability to directly underwrite risk into other EU/EEA member countries.

 

Other factors to be considered when choosing a domicile, using Barbados as an example, include:

  • International accreditation: Renowned as one of the premier holiday destinations in the Caribbean, Barbados is recognised by the United Nations as one of the top developing nations in the world, with a reputation for its integrity as an international financial centre.
  • Longevity and track record: The domicile had its genesis in 1983 with 266 captives on record (at December 2017), and a stated objective of providing a high quality and right-sized jurisdiction through its extensive treaty network. This comprises 39 double taxation agreements (ten with CARICOM) and nine bilateral investment treaties in force, as well as five tax information exchange agreements.
  • Flexibility of insurance regulation: In Barbados, direct writing is allowed when a group may want to use a captive to incubate emerging or difficult-to-insure risks. This may not be the case with every domicile – in Luxembourg, for example, requests to form direct captive insurance companies without a reinsurance affiliate are typically declined by the authorities.
  • Solvency II: Although Barbados is not presently seeking Solvency II equivalence, other domiciles are. Captive owners need to understand that Solvency II-equivalent domiciles bring with them more stringent capital, governance and regulatory reporting requirements.
  • Base erosion and profit-shifting (BEPS): Barbados has officially joined the “Inclusive Framework on BEPS”, pledging to implement measures aimed at preventing tax avoidance by multinationals and improving tax dispute resolution. The likelihood exists that captives which are regulated under a Solvency II regime could have an advantage in tackling the action items set out by the OECD/G20 BEPS Project.

 

Barbados remains one of the largest global captive insurance domiciles, with a well-regulated business environment, excellent infrastructure, modern legislation and an expanding treaty network.

 

As the captive insurance industry continues to expand, it is expected that international financial centres such as Barbados must develop a niche strategy within the limitations of a new world order requiring more onerous governance and regulation.