The liquidation of New Zealand insurer CBL and its Ireland-based European subsidiary, CBL Europe in February 2018, appears to have made ripples if not waves with the further voluntary liquidation of its subsidiary, Luxembourg-based broker/tied agent Securities & Financial Solutions Europe (SFS Europe) in July 2018, just 5 months later.
SFS Europe specializes in the construction sector and was providing its services in France under the EU’s freedom of services and freedom of establishment regime.
SFS is not active in employee benefits and HR managers should have no cause to worry, nevertheless, there are lessons to be learned from SFS Europe’s demise, especially at a time when the new European Insurance Distribution Directive is about to come into force in October 2018.
To recap on what happened: SFS was fined €5,000 and issued a cease-and-desist order by the Luxembourg regulator, the Commissariat aux Assurances (CAA) in December 2017. In early January 2018 the company appealed against the CAA’s finding that it “had been operating outside certain aspects of its insurance authority,” meaning it was acting both as a broker and as a tied agent for CBL Insurance Europe.
Being a broker and a tied-agent simultaneously is prohibited as it carries an inherent conflict of interest. A broker represents the insured client; a tied agent represents the insurance carrier. How one can represent both the buyer and the seller without a conflict of interest remains a mystery? Something the regulator could also not agree with and hence the decision to step in.
In any event, the appeal was heard and rejected in late January 2018. SFS Europe, at that time, stated, “Apart from increased pressure from competitors emboldened with the news, SFS does not believe the change in operating procedures will materially affect its operating revenues.”
As it turns out, in March 2018 the company had its broker license indefinitely suspended by the CAA; with the subsequent voluntary liquidation a logical consequence, placing approximately 50 jobs at risk..
European insurance regulators are (increasingly becoming) serious when it comes to upholding principles, such as the fundamental difference between a broker and a tied agent. The former works for and on behalf of the insured party; the latter is an extension of the insurance company it represents. After many years spent working with insurance carriers on the implementation of Solvency II regulations, regulators across the E.U. now have more time on their hands (and new regulations to carry out) and are likely to turn their gaze to the world of insurance distribution.
The credibility of the industry is suffering with the recent numerous overly complex, less than transparent, and ultimately ethically challenged legal arrangements where the distinction between the ultimate risk carriers and distributors is blurred and financial flows are not disclosed.
Of note is that managing complex structures and disruptive business practices in a niche market from far away carries significant risks. CBL New Zealand set up an insurance subsidiary in Ireland to address the French construction insurance market through a Luxembourg based distributor. It then constituted its Irish Board of Directors with executives based in New Zealand, London, and Dublin (see below). According to their respective LinkedIn profiles, not even one has limited proficiency in French or in German, let alone Luxembourgish, the three official languages, making it difficult to communicate with French and Luxembourg authorities in case of trouble.
Harris, Donaldson, and Mulholland, who were also on the Luxembourg board resigned in March 2018, leaving local management at the helm of a sinking ship. Addressing a rather idiosyncratic Continental market, it might have made sense to work with at least a few local, experienced independent directors with good market connections and experience with the local regulators.
Footnote: CBL Europe Board of Directors, June 2018
- Peter Harris – Chairman & Non-Executive Director (based in New Zealand)
- Brendan Malley – CEO & Executive Director
- Carden Mulholland – Non-Executive Director (based in New Zealand)
- Paul Donaldson – Independent Non-Executive Director (based in London)
- Kevin O’Brien – Independent Non-Executive Director (based in Ireland)