The government has confirmed it will proceed with the planned extension of off-payroll rules into the private sector from April.

The confirmation came in a report from Treasury published this morning into the review of the implementation of the extension off-payroll working rules into the private sector.

However, having listened to stakeholders the government also revealed it is making a number of changes to address concerns, and support the smooth and successful implementation of the reform.

These include:

• Customers will not face penalties for errors relating to off-payroll in the first year – barring cases of deliberate non-compliance 
• HMRC has reaffirmed that information resulting from changes to the rules will not be used to open new investigations into Personal Service Companies (PSCs) for tax years before 6 April 2020, unless there is reason to suspect fraud or criminal behaviour
• The government reaffirms the rules will only apply to services carried out from 6 April 2020 onwards
• The government will legally require clients to respond to a request for information about their size from the agency or worker, and update the legislation to address concerns raised over the rules as they apply to off-shore companies.

While HMRC has already published detailed guidance on the reform and clarified the position on a range of concerns raised – for example, the client-led status disagreement process, including by making explicit the time limits within which a disagreement can be raised – the Employment Status Manual guidance has been further updated in line with other outcomes from the review. 

Although HMRC has already published a factsheet to support contractors prepare for the changes, and are continuing to step up their communications in the run-up to implementation, it will launch further products to support contractors in understanding the changes, including a self-help guide on how to spot tax avoidance schemes.

Government further committed to continue to listen to stakeholders, and monitor and evaluate the operation of the rules, while HMRC is to commission external research into the impacts of the reform six months after implementation, including on how status assessments are being made.

Commenting on today’s development, Samantha Hurley, director of operations at APSCo and co-chair of the government’s IR35 Forum, said the association’s members will welcome the extra time to adjust that the promised ‘soft landing’ offers.  

“When the review into implementation was launched last month, APSCo made it very clear that we were not seeking a complete delay to implementation, but a period of time within which recruitment businesses and end clients wouldn’t be penalised. This was communicated directly to HMRC and other stakeholders, and we are extremely pleased this recommendation has been listened to and taken on board by the government.

“HMRC has long maintained that it genuinely wants businesses to comply with the new rules and that there will be no witch hunt – and this latest move suggests this may truly be the case. The fact that it has also published additional guidance to educate the supply chain is welcomed by APSCo.

“In addition, policy changes announced today also offer much needed clarity for our members. The fact that all businesses now have a statutory obligation to confirm whether or not they are ‘small’ takes the onus off others in the supply chain, while confirmation on the timeline for disputes is also welcomed. Many of our members will be particularly relieved that the rules will no longer apply to clients based wholly overseas, with the obligation to determine tax status in these instances moving back to the contractor.

“While there is no escaping the fact that the extension of off-payroll rules is not ideal, overall, this is a significant win for the professional recruitment sector and I’d like to thank all of our members who got involved, shared their experiences and contributed to this outcome.”

Sophie Wingfield, director of policy at the Recruitment & Employment Confederation, said: “It’s a positive move that the Treasury is putting the obligation on small businesses to declare whether the IR35 rules apply to them. This is a direct response to what the REC has been calling for and should provide recruitment businesses with much needed clarity on their obligations.”

In relation to the decision by HMRC to take a ‘light touch’ approach to enforcement, Wingfield added: “Taking a ‘light touch’ approach to enforcement in the first year will create more problems than it solves. The consequences of not complying with tax law should be clear. Not doing so could create an unlevel playing field where compliant employers lose out to unethical ones. We need to see more details about how this approach will work in practice. What’s obvious from this is that the Treasury know IR35 is not quite right. Rather than tinkering around the edges of this complex legislation, we need the government to delay implementation until 2021 to make sure it’s done properly.”

While welcoming government’s promise of a soft landing in implementation of the rules, Julia Kermode, CEO of the Freelancer & Contractor Services Association (FCSA), added she is cautious that this may cause more confusion if clients and contractors are misled into thinking that the legislation has been delayed or will not be enforced.
 
“We have confirmed with HMRC that the soft landing is genuine and that penalties won’t ordinarily be applied for the first 12 months of implementing the reforms. This is good news because HMRC’s education programme was delayed due to the general election, so a number of businesses are only finding out about the reforms and their new liabilities now, just weeks before the legislation comes into effect. However, the soft landing does not mean that businesses and individuals can plan to ignore the changes because HMRC has also confirmed that penalties will be applied where there is deliberate non-compliance.

“FCSA also welcomes the clarity regarding overseas clients being out of scope, plus the amendment requiring clients to confirm whether or not they are small so that the supply chain can ascertain if the new off-payroll rules apply.
 
“It has been clear to me for some time that HMRC has been hell bent on planning to implement the off-payroll reforms this April come what may, and the publication of their review clearly shows that these reforms are coming whether we like it or not. I can’t see the budget on 11 March bringing about a U-turn, so it would seem that the House of Lords inquiry into the legislation is the last hope to affect any meaningful change.
 
“Having given evidence to the House of Lords this week, it was clear that they were listening to the various representations, and I did get the distinct impression that they were not supportive of the legislation. Time will tell as to whether or not they can make a difference but, in the meantime, I would strongly urge everyone to prepare for the reforms as penalties will still be issued for deliberate non-compliance.”

Make no mistake, the sudden news that performance management director Jon Hancock is leaving Lloyd’s will send ripples across the London market.

He’s the man who stopped the rot and set the wheels in motion for a more profitable Lloyd’s. At a time when the future for 1 Lime Street looked bleak, he demonstrated that a firm hand and a risk-based approach to regulation could start to rectify the mistakes of the past, albeit slowly.

Lloyd’s had suffered from a crisis of confidence – even John Neal acknowledged when he arrived as CEO that the marketplace had lost its mojo. Restoring positivity in the market has been a big win for the Corporation in recent times, and Hancock’s role across performance and transformation was an important driver of that renewed confidence.

It goes without saying that his exit is a major blow for Lloyd’s, at a time when momentum around performance and strategy was just starting to gain pace.

Lloyd’s is keen to publicly show that there are no hard feelings. The transition will be flexible to suit both parties, they have said. There will be no cliff edge.

Both Neal and Hancock have stressed that this separation is nothing to do with differences of professional opinion – nevertheless market tongues will still wag on whether this departure is really to do with the fact that Hancock’s more measured view of how to implement change was at odds with Neal’s ambition to spark a big bang moment for Lloyd’s.

Departing before he has done four years in the role – and in a critical year for the Lloyd’s transformation work – certainly suggests there is more behind the move than just itchy feet.

When we spoke to him, Hancock stressed a desire to return to the commercial side of insurance, to be challenged in a way that only P&L business accountability can do.

This only works to emphasise a wider challenge that Lloyd’s faces in retaining and keeping the best talent. The best staff are reluctant to work at regulators long term.

Talent retention and turnover of staff has historically been a big issue within the Corporation, even if recently improved sentiment around Lloyd’s puts it in a much better position to recruit a highly credible successor.

The next question for the Corporation is who wants to take on arguably one of the toughest jobs in the global (re)insurance market.

Few individuals impact the performance of such a wide swathe of the market. The performance management director has a remarkable level of influence on both market profitability and pricing dynamics.

For the Corporation, performance is a key pillar of the strategy and it cannot afford to falter now that gains are starting to be made – and particularly with another calendar-year underwriting loss most likely in the pipeline.

Neal has stressed that the tone of performance management will continue with the new recruit, and the standards that Hancock has set will “100 percent” continue.

For the good of the market, this statement must prove to be more than just lip service.

But at the same time, there will not be complete continuity between the new regime and the old. The new performance management director will surely want to make his or her own mark in the role and will not want to live in Hancock’s shadow.

It will be a fine line to tread, while carrying a huge weight of responsibility.

As we have said before, the talent element is crucial to Lloyd’s ability to carry out the transformational change it is targeting.

With much more still to be done, the next performance management director will be one of the most important hires, if not the most important, Lloyd’s has made in recent times.

Anticipation of a harder market and the creation of an unrestricted light-touch cohort of syndicates has resulted in an increase in the aggregate Lloyd’s market stamp capacity of 6.4 percent to £33bn ($43.6bn) for 2020.  

The Insurance Insider’s annual stamp capacity survey found that overall the market is permitted to write £2bn more business for 2020 than this year.

The increase also marks a reversal of the contraction in stamp seen for 2019, when the Lloyd’s performance management directorate’s clampdown had led to the exiting of a number of classes and a tough stance on growth. Stamp for 2020 is also higher than that recorded in the 2018 survey.

Stamp capacity is the amount of sterling business a syndicate is authorised to write in a year of account. For the purposes of this survey, stamp capacity is calculated as gross of reinsurance and net of brokerage.

The measure is not a perfect indicator of the amount of business that syndicates intend to write, with carriers choosing to maintain different amounts of headroom at different points in the cycle. However, it remains a useful proxy for the business the Lloyd’s market expects to write in a given year.

This publication previously reported that planned premium growth for the market in 2020 would be a few points higher than the expected risk-adjusted rate increase of 5 percent.

The top 10 syndicates by stamp capacity also collectively grew their stamp by 8.9 percent to £14.1bn.

The largest syndicate in the market is now Beazley’s flagship Syndicate 2623, which has grown its stamp by 19 percent year on year to £1.9bn for 2020.

Syndicate 2623 is understood to be a light-touch syndicate, one of a group of 15 which are permitted unrestricted growth due to a good track record.

As previously reported, the light-touch cohort of syndicates grew planned premium by 14 percent for 2020, compared to 3 percent for the rest of the market.

Syndicate 2623 has replaced MS Amlin’s Syndicate 2001 as the largest syndicate in the market. In 2019, Syndicate 2001 had a stamp capacity of £1.85bn, but has reduced this by £250mn for 2020 to become the third-largest syndicate with a stamp of £1.6bn.

The de-emption comes after news that MS Amlin would exit nine business lines as part of remediation efforts.

The standard setter has deferred the effective date for International Financial Reporting Standard (IFRS) 17 – Insurance Contracts – to annual periods beginning on or after 1 January 2022

This, the International Accounting Standards Board (IASB) said, was so that any amendments being explored would not disrupt its implementation.

“Together with the significant change that IFRS 17 will cause, this constitutes exceptional circumstances that justify the deferral,” the IASB said. Fourteen board members voted for the change.

IASB also chose to defer the expiry date for the temporary exemption to IFRS 9 in IFRS 4 by a year. All insurance entities must apply IFRS 9 for annual periods on or after 1 January 2022.

This more contentious deferral – which would mean some entities not applying the standard up to four years after all other entities – gained 13 votes.

IASB said, “Without the deferral there would be two sets of major accounting changes in a short period of time, resulting in significant cost and effort of the preparers of financial statements”.

Philippa Kelly, head of Financial Services at ICAEW, said, “Additional time will allow insurers and those working with insurers the time needed to ensure they have the technology required to effectively implement the standard available and in place.”

She said that insurance companies should make good use of the additional time to deliver on high quality implementation.

Alex Bertolotti, IFRS 17 leader at PwC said that some insurers have been lobbying for this for some time and others have been requesting clarification due to the costs of moving ahead.

He noted that the full impact of deferral “can only be fully assessed after reviewing potential changes to the standard which the IASB board will consider in December”.

“The additional time will help alleviate some risk from existing plans, however many companies still have a lot to do and cannot afford to press pause,” Bertolotti said.

“To stand still is to fall behind”, he added.

Francesco Nagari, global IFRS insurance leader at Deloitte, described the IFRS 17 deferral as a “parallel shift of the deferral in IFRS 9 mandatory adoption” that insurers will largely welcome.

A recent survey from the Big Four firm found that 90% of insurers were either “somewhat” or “very” confident at meeting the previous 2021 deadline, but there have still been recent calls to delay, he said.

“Substantial effort is already underway to implement the standards, with budgets in some instances expected to exceed €50m (£43.4m),” said Nagari.

While investors and regulators are eager for what IFRS 17 will bring, the additional time will allow for insurers to prepare, which Nagari said is a “reasonable compromise between the two stakeholder groups”.

The IASB said that the proposed deferral will be subject to public consultation, which is expected next year, and the board expects to discuss the merits of potential amendments during its December meeting.

The vast majority of insurance companies worldwide are not prepared for the incoming accounting standard IFRS 17, despite recognising the significant risks it poses to their business

Data from 240 insurance firms reveals that 92% have yet to put their solutions in place, and that 88% know they will need to invest in new processes to support disclosure requirements.

That is according to a new report by Aptitude Software, with chief technology officer, Martin Redington, warning IFRS 17 will be the “most significant change to insurance accounting that has ever taken place”.

“Time is of the essence. It is a massive project with significant risks, and there is not a one-size-fits-all solution, bespoke solutions are required,” he said.

“Insurers need to be selecting their vendors now and working on implementing IFRS 17 financial accounting solutions to avoid the skills shortage and ensure they comply in time.”

The report shows that 78% of insurance companies are still in the early research and impact analysis phase of implementing the accounting standard, which comes into effect at the start of 2021.

It identifies a wide range of challenges that insurers will need to overcome, with 84% of firms having cited having a disparate actuarial environment as being a constraint to delivering consistent calculations.

In addition, it was found that 39% of insurance companies expect to kick off their implementation projects in the second quarter of this year, suggesting a huge demand for expertise at the same time, and a potential skills shortage.

Ernst & Young estimates that smaller life insurers with less than $10bn (£7.4bn) of gross written premium will need a budget of $25m to comply with IFRS 17, while those with more than $25bn will need to spend approximately $150m.

“Insurance company profits are under duress as many sectors have become commoditised and many firms recognise the need to innovate their offerings and operations,” Redington continued.

“In a post-IFRS 17 world, it will be difficult for CFOs to service the many financial and regulatory requirements without an approach that centralises control of reporting and financial data.

“IFRS 17 is already proving to be the straw that broke the camel’s back, driving insurance CFOs to modernise their financial systems.”

The US property and casualty sector slumped in the first nine months of the year to deliver a $20bn underwriting loss after a trio of hurricanes pushed the industry combined ratio to the highest level in five years, according to rating agency AM Best.

Cat losses had already reached $38.4bn before the beginning of the fourth quarter, which brought Hurricane Nate in the Gulf of Mexico and wildfires that ravaged California.

The claims bill is almost double the figure from last year, climbing 89 percent, and higher than AM Best’s $36.1bn estimate for full year 2012, which includes Hurricane Sandy.

As a result, AM Best estimates that catastrophes added 9.8 points to the sector-wide combined ratio, a significant increase on the 5.4 point estimate the rating agency forecast last year.

The events pushed the industry’s combined ratio to 104 percent in the first nine months of the year, up 4.3 points from the same period in 2016.

Stripping out reserve releases for the latest period exposes a combined ratio that is even further in the red at 105.7 percent.

The underwriting loss calculated by AM best for the year so far is almost 10 times the $2.3bn deficit the rating agency reported this time last year.

It said that an 11.3 percent uptick in incurred losses for the period more than offset a 4 percent increase in net premiums earned.

“The industry benefited from a $2.5 billion increase in net investment income earned, which was negated by a $4.1 billion loss in other income, reflecting the impacts of a retroactive reinsurance contract entered into in February 2017 by AIG and National Indemnity,” AM Best said, referring to the Berkshire Hathaway subsidiary.

The rating agency said – for the first nine months of 2017 – the deal helped drive down the industry’s total pretax operating income by 65 percent to $10.8bn.

But, despite a $7.9bn decline in net income, industry surplus grew to $699.8bn during the period driven by $11.2bn in unrealized gains, mostly from Berkshire Hathaway-owned firms

Lloyd’s has filed an application with the Belgian regulator to form an insurance company that will allow it to continue to write European Economic Area business after Brexit takes effect.

The application was filed with the Belgian central bank in mid-October following lengthy pre-application discussions.

With the gestation of Brussels-based Lloyd’s Insurance Company SA broadly progressing as planned, the market should be on track to write business via the entity for the January 2019 renewals.

Assuming it gains the go-ahead, the entity expects to write risks from a region which accounted for about 11 percent of Lloyd’s 2016 premiums through the market’s current distribution channels of brokers, coverholders and managing agents.

The Corporation has also indicated to stakeholders that it was confident a clampdown on reinsurance cessions by the EU insurance regulator would not derail plans for the new subsidiary.

Recent suggestions by the European Insurance and Occupational Pensions Authority that it wanted Brexit satellites to keep 10 percent of the risk written by their new EU subsidiaries had briefly appeared to jeopardise Lloyd’s planned Brussels set-up.

Lloyd’s had selected Belgium as the location for the new unit in part because of the understanding that the new company could cede 100 percent of the risk to London.

The 100 percent cession goal reflects Lloyd’s aim to establish a capital-light entity in Brussels that would be regulated under the Solvency II standard formula.

Once it has gained Belgian approval, Lloyd’s European subsidiary will apply to the Prudential Regulation Authority (PRA) to establish a third-country branch in the UK.

This would allow staff in the UK to carry out regulated activities on Lloyd’s Insurance Company’s behalf when Britain leaves the EU.

The UK branch plan negates the need for intermediation to take place in Europe and for intermediaries to require authorisations from the local conduct regulator.

The PRA has traditionally preferred the subsidiary model over branches, but is thought unlikely to object to Lloyd’s Insurance Company’s UK branch since it is the main regulator of the Corporation itself.

Lloyd’s is also understood to have resolved questions over financing of the entity.

It has opted against the pay-to-play model favoured by some carriers that have other European operations they can utilise. This would have mirrored the structure used for Lloyd’s China.

Instead, the costs will be funded centrally, with all managing agents effectively paying in regardless of whether they decide to use the platform.

Lloyd’s CEO Inga Beale has previously said that the Corporation is likely to have 10 to 20 Brussels-based staff initially, with around 60 overall in continental Europe.

The staffing plans of Lloyd’s have yet to be disclosed, but it has previously said the Brussels workforce would be “in the tens”.

Other elements yet to be decided include Lloyd’s Insurance Company’s IT infrastructure, with a tender still to be launched.

One adviser noted that larger companies with both Lloyd’s and company market operations generally expected to use the Lloyd’s platform as well their own planned EU hubs to write risk.

UK carriers looking to establish EU subsidiaries for Brexit face less room for manoeuvre after the European Commission (EC) issued plans to bolster the bloc’s financial regulators at the expense of national watchdogs.

The EC’s proposals would give the European Insurance and Occupational Pensions Authority (Eiopa) greater powers to promote “convergence” among national insurance regulators in the way they supervise internal models under Solvency II.

Eiopa and the other so-called European Supervisory Authorities (ESAs) would set EU-wide priorities for their respective sectors and vet how national watchdogs fulfil that remit.

The plans, part of the EU’s three-year-old Capital Markets Union project, elicited some accusations of a regulatory power grab, while Insurance Europe called for clarification of the proposed “material increases” in both Eiopa’s scope of activities and the new regime’s oversight mechanisms.

Mazars partner Sarah Ouarbya said that the proposed strengthening of central powers “should level the playing field even more across the EU”.

“Insurers that have chosen a country because they perceive the national regulator as being more pragmatic than others may find that advantage is lost over time,” she added.

Ouarbya also noted that references in the EC documentation to the delegation and outsourcing of business functions to non-EU countries could stymie some UK groups’ plans.

“Many banks and insurance companies are working on the basis that they will be able to delegate or outsource business functions back to the UK from their new EU hub,” she added. “These plans may be disrupted if additional barriers are put in the way and there is a distinction between EU and non-EU outsourcing.”

Herbert Smiths Freehill partner Geoffrey Maddock concurred.

“From firms’ point of view, the clear concern will be that once Eiopa has exerted greater control over this area, it will be able to make life increasingly difficult for groups who wish to retain most activities in the UK by means of reinsurance/outsourcing,” he said. “So the key will really be what actual behaviour follows from Eiopa, and whether it is reasonably based on legitimate financial stability/policyholder protection grounds or is more motivated by protectionist anti-third country objectives.”

Last week’s proposals follow edicts from the European Securities and Markets Authority (Esma) and Eiopa designed to stamp out the creation of “letterbox” entities within the EU to house UK subsidiaries.

Under the latest proposals, the ESAs would take decisions more independently from national interests, with newly created executive boards speeding up the decision-making process.

Funding of the ESAs would also be separate from the national supervisors to ensure independence.

The EC said there would be a mechanism for interested parties to appeal to the EC if a majority think the ESAs have overstepped the mark.

In issuing the proposals the EU executive abandoned the prospect of a merger of the European Banking Authority and Eiopa – a concession that Insurance Europe welcomed.

Also on the positive side, Ouarbya said that UK insurers would generally welcome more consistency in the way that internal models are validated across the EU, given the Prudential Regulation Authority’s tough reputation in this regard.

The proposals take the form of an omnibus text, which amends existing legislation.

They will now be discussed by the European Parliament and the European Council.

Hurricane Irma generated about $25bn in insured losses, including $18bn in the US and $7bn in the Caribbean, Karen Clark & Company estimated today.

Included in the totals are losses to buildings and insured structures, contents, autos and business interruption, the company said.

The assessment excludes losses covered by crop insurers and the National Flood Insurance Program run by the Federal Emergency Management Agency, the catastrophe modelling firm said.

As one of the most powerful Atlantic hurricanes on record, Irma posed a much greater threat before being pushed west as it headed toward the US.

Had the track not made that shift before making landfall on the continental US and hit Miami, the insured losses might have been as much as $150bn, the company said, mainly driven by strong winds.

As it was, the storm’s track brought it ashore on the Gulf of Mexico side of the Florida peninsula, about 50 miles south of Fort Myers and took it inland.

Irma’s intensity weakened as it passed east of the Tampa-St Petersburg area.

The track spared both Miami and Tampa-St Pete from the worst of Irma’s wrath as even the Gulf storm surge brought on by the hurricane proved lower than anticipated. The cities on the central Gulf coast are among the most at risk from surge in the Sunshine State, the modeller said.

“Even the wind damage turned out to be relatively minor” after the storm’s rapid decay, the company said. “Direct wind impacts were mostly limited to mobile homes, light structures, signage, and spotty roof and window damage” in the parts of the Florida mainland that Irma passed over.

The modeller said most of the insured loss in the US occurred in Florida. In addition, losses occurred in parts of Georgia, South Carolina and Alabama, where Irma brought heavy rains.

But the storm’s strong winds in its northeast quadrant extended out over the Atlantic as well and led to higher than expected storm surge and flooding in cities such as Jacksonville, Florida and Charleston, South Carolina. Even in parts of downtown Miami surge driven flooding occurred.

In the Caribbean, Irma swept across islands with full destructive force brought against St Martin, Barbuda, Anguilla and the British Virgin Islands. Over 50 percent of property value was destroyed on the hardest hit islands, the company said.

While the storm spared much of Puerto Rico, the Florida Keys, especially east of Cudjoe Key where Irma made its first US landfall, were raked by 130mph winds and flooding. Irma’s greatest destruction in the US took place in the Keys.

The storm, which had sustained winds of as much as 185mph (1,270 kph) as it churned across the Caribbean, was one of the strongest Atlantic hurricanes on record and the most powerful ever to strike the Leeward Islands, the company said. It was the strongest storm to hit the Bahamas since Hurricane Andrew in 1992.