London: at the tipping point

The word ‘Brexit’ strikes fear into the heart of many British citizens, including a number of insurers. By the end of 2017, the UK is expected to hold a referendum on whether to leave the EU. If the UK exits, insurers will be faced with a number of consequences.

A key advantage of membership, the passporting system that allows UK insurers to write insurance business in any EU country without the need to establish subsidiaries, is likely to be abolished. This means that UK insurers cannot passport business to Europe, and EU firms will not be able to write business in the UK via passporting rights.

David Gittings, chief executive officer of the Lloyd’s Market Association (LMA), believes life for insurers would be problematic if this system were scrapped. He is against the UK exiting the EU.

“Access to European markets under the passporting scheme is very important and without this we would have a number of problems. From a purely business point of view, I think it would be disadvantageous to exit the EU,” he says.

However, not all agree it will be such a big issue. Rating agency Standard & Poor’s (S&P) is confident that although insurers may face additional costs if the UK were to exit the EU, business would likely continue unchanged.

In a June 2015 report, Brexit Risk for the UK and its Financial Services Sector: It’s Complicated, S&P explained that 562 non-life insurers and 177 life insurers from outside the UK write business in the UK via a passport, such as Zurich Insurance. On the other hand, AIG writes all of its European business from a UK entity.

“In the absence of passporting rights these groups would have to set up UK subsidiaries. This would necessitate setup costs, capitalisation, and probably more stringent regulation by UK regulators, the Prudential Regulation Authority and Financial Conduct Authority. Equally, UK insurers would need to acquire licences and regulation for operations in the rest of the EU,” said the S&P report.

It added that although this may be inconvenient and expensive in the short term, the changes are unlikely to lead to any but the smallest and most marginal of businesses to cease writing in the UK.

Damaging for the hub

Following the announcement of the referendum that could lead to a potential Brexit, Intelligent Insurer asked its online readers the question: ‘Would a UK referendum in favour of leaving the EU damage London’s role as a global hub for re/insurance and risk transfer?’

The result: a resounding ‘yes’. More than 70 percent of respondents believe that an exit will damage London’s role, with many adding that there were a number of alternative markets for re/insurers.

“Lloyd’s was developed on the basis of reputation. Leaving the EU would encourage Dublin, Paris, Lisbon and Berlin to ‘take on’ the UK,” said one respondent.

Another added: “Dublin is an alternative, signed-up member of the EU and its various cross-border directives with good infrastructure. London businesses may redomicile or set up outposts in order to circumvent issues (real or imagined) created by a UK departure.”

Somewhat mitigating the risk of an exit is the fact that the EU represents only one-third of the UK’s substantial financial services net export surplus. The sector is far more reliant on trade with non-EU countries, especially the US, and is a very limited recipient of inward investment, according to S&P.

There’s also the potential for the UK to negotiate agreements to replace EU membership, such as seeking to retain access to the single EU market through membership of the European Free Trade Association (EFTA).

Keeping pace

As local and regional re/insurance hubs continue to pop up across the globe, the position of the London Market is becoming increasingly under threat.

In 2014, the London Market Group (LMG) and the Boston Consulting Group published the results of extensive market research looking at the London Market. The report claimed that it is at a tipping point as it fails to capture opportunities in emerging markets and loses its share in reinsurance.

The market is heavily reliant on the UK, US, Australia and Canadian markets, with only 0.5 per cent of the absolute growth in emerging market premiums in markets such as Latin America, Asia and Africa placed in London.