International Financial Services - where to now?
RL360° chief executive David Kneeshaw gives his views on the challenges facing the offshore life industry
Chief Executive, RL360° (February 2010)
For Isle of Man insurance companies the world has changed. This is true also for insurance companies from other "offshore" centres. Of course, we are no longer "offshore"; we are international. I understand the sentiment and the desire to rebrand the industry, but now more than ever those big brother countries who lurk over the Isle of Man choose to see us as beyond the pale and a bit "dodgy".
Is this fair? For the most part, no, but we live in unsettled and fearful times, and fear breeds protectionism and a desire to point the finger of blame elsewhere. And international financial centres, whether the Isle of Man or elsewhere, are convenient scapegoats.
Into this mix another problem affects the market, namely a fundamental drop in business for many of the main players. The single premium market, mainly Offshore Bonds, was down 60% by mid-way through 2009 and the end of the year figures will probably not be much better. When you realise that the biggest market, the UK, was sold mainly for volume rather than margin, you have an unholy mix that must be having an affect on boardroom discussions about plans for 2010 and beyond.
That isn't just a discussion about sales. It must, or should also be, a discussion about profitability, costs, people and infrastructure. I anticipate some big changes in the industry during 2010. This problem is exacerbated by the management structures of many of the Island's insurance companies. How many have full decision making carried out on the Island? Are some companies now no more than operational centres?
At the risk of sounding smug RL360° has gone against the trend and moved all management ONTO the Isle of Man. Furthermore, we have consistently eschewed sales volume at the expense of margin so every sale that we make contributes to the bottom line, even if the headline sales figures look, as a result, less superficially ‘sexy’.
Further, as we are a combination of the former Scottish Life International and Scottish Provident International we undertook a thorough review of our costs and infrastructure in the winter of 2008/09. As a result of the above, RL360° is fairly sanguine, but not complacent, about the current situation.
I do not envisage the world of international insurance emerging from the current financial crisis unscathed. Does this mean that all is doom and gloom? Not necessarily, for in fact I am an optimist! But the optimism has to be put into context.
First, when was the last time a "major" offshore insurance company chose the Isle of Man in which to launch? Dublin provides access to Europe, and even Gibraltar and Malta are more European friendly than here.
Second, around the world Governments are seeking to protect themselves; it isn't just the UK. Sometimes the activity is regulatory and designed to overcome perceived mis-selling scandals, as in Hong Kong. Sometimes it is revenue protection dressed up as regulation, as in South Africa. Sometimes regulatory processes grind to a halt given the massive scale of their other problems; Dubai is a perfect example.
Whatever the reason, it is increasingly difficult to operate internationally without regulated offices around the world and a credible parent. However, with the infrastructure comes added cost and complexity.
Third, if 2009 sales figures make for gloomy reading then be prepared for something similar in 2010. I doubt there will be a quantum leap in offshore bond sales for the foreseeable future. So accept the reality that this is the new size of the industry and make your business decisions accordingly.
So, if that is the context in which we operate then where is the hope? For those companies that have the appropriate, lean infrastructure there is still business to be written, just not as much as before. Around the world the uncertainty has increased the desire for investors to seek safe havens for their money. In many developing countries the Isle of Man has a strong "British" reputation, and represents somewhere they feel happy to park their savings.
In addition, despite the best efforts of the current UK Government, the UK financial and tax situation is actually encouraging high net worth investors and businessmen to "move" assets offshore. The Isle of Man can benefit from this.
What is crucial for the insurance companies is that the Isle of Man Government and regulators promote heavily around the world to advisers, consumers and other regulators, both the Island's financial and regulatory strength, and have better education of the various compensation schemes. If there was a magic wand to be waved then creating some hybrid relationship with Europe, in the way that Switzerland has succeeded in achieving, would help.
There will be survivors and, over time, they will grow stronger. The keys to success are economies of scale, and a lean infrastructure that reflects the business you are now, not the business you once were or would like to be in the future. Regulated offices internationally will increase in importance, and the Far East and Middle East are becoming crucial. Management must be compact, and decision making flexible, quick and decisive. Cash is King: sales volumes are not.
In short, 2010 will prove to be a pivotal year for the "offshore" insurance industry. Not everyone will like the experience, but some will emerge stronger for it.