Brexit: doom and gloom or business boom?
“TMR is in a good position because whatever happens, Zurich writes most of our continental European business,” says Mark Julian, head of Tokio Millennium Re’s (TMR) UK Branch, speaking confidently at the Monte Carlo Rendez-Vous about how his business might be placed in a post-Brexit world.
It is the kind of rhetoric often heard during at Monte Carlo this year as reinsurers looked to reassure clients that the UK’s decision to leave the European Union would have little impact on their capacity to continue to trade.
Some companies, such as TMR, already have the breadth of operations to ensure the decision will make little difference to its ability to trade with European cedants. For others, it is not so simple. There are also the broader implications: many remain uncertain of the impact Brexit might have on the wider economy and thus business, while others are cautiously optimistic about the opportunities it presents.
The UK’s access to the single market and how passporting rights will be dealt with going forward are the primary concerns, but market participants were also worried about the wider implications of the decision on everything from interest rates to currency fluctuations during the event.
Moses Ojeisekhoba, CEO of Swiss Re’s reinsurance business unit, for example, feels there will be an impact on the economy, which could lead to slower than anticipated growth for some parts of the UK insurance industry.
Ojeisekhoba suggests that a transition risk is likely owing to the depreciation of the value of sterling and the likelihood that interest rates will now remain lower for longer, putting extra pressure on investment returns.
Rating agency AM Best holds a similarly negative outlook of current market conditions, as interest rates remain at historic lows. Greg Carter, the managing director of analytics for EMEA at AM Best, says the Brexit vote might result in long-term turbulence in exchange rates, with sterling weakening with little prospect of reversing, at least in the short term.
THE KEYS TO EUROPE
The biggest obvious concern arising from Brexit is whether UK re/insurers will lose access to passporting rights, the mechanism by which they enjoy unfettered access to write business in European countries, and vice versa.
Market participants believe that alternative arrangements must be put in place to give certainty to the market.
Paul Latarche, director of Moore Stephens, said there is a huge amount of uncertainty regarding how Brexit might pan out, but his clients must consider the risk of passporting rights being lost and the implications of that.
“If you are for example a Luxembourg-based insurer and Brexit affects passporting rights, you will not have a licence to write UK-domiciled risks,” he says.
Insurers must find a workaround if they lose their passporting rights and wish to continue to do business with Europe, he adds.
“Uncertainty is never good in any market, so insurers are pushing very hard to get early indicators—which is positive.”
He also suggests that Bermuda, which benefits from Solvency II equivalence, might be looked upon more favourably as insurers see it as a safe haven with access into the single market.
“Bermuda is definitely one of the options, but I think it’s more likely that people will choose a domicile that’s in the EU,” Latarche says.
Brad Adderley, a partner at Bermuda-based law firm Appleby, agrees that with regard to Solvency II equivalence, more business will come to Bermuda as companies leverage that to access the EU.
Adderley does not believe Brexit will be the main driver for this change, however.
Tim Faries, Bermuda managing partner at Appleby, agrees. “Certainly not yet, anyway,” he adds.
“We haven’t seen a great exodus to Bermuda. We have spoken to a number of people from the UK about the implications of Brexit but they’re looking at a number of jurisdictions.”
While some re/insurers are concerned about what legislation in the UK will look like post-Brexit and the impact it will have, Matthew Rutter, partner at law firm DAC Beachcroft, suggests some of the concerns are overstated.
“As to the key question of what UK financial services legislation will look like following Brexit, we think the answer is that it will look very similar to the way it does now,” he says.
“There seems little reason to expect a bonfire of regulations immediately following Brexit. For some in the market, however, the risk of the loss of passporting means that they will need to move quickly to put alternative arrangements in place.”
MAKING THE MOVE
Lloyd’s of London’s has already suggested that it may be forced to move some of its business to continental Europe as part of the Brexit vote, and it is possible that re/insurers may start to follow suit and take similar measures.
Inga Beale, chief executive of Lloyd’s, said Lloyd’s was exploring the possibility of forming a subsidiary in an EU member country, to access the market in the same way a company might.
“Because Lloyd’s is a unique entity and not a company this is far from straightforward,” Beale said. “It is further complicated by the fact that each regulatory regime within the European Economic Area (EEA) is different.
Latarche says that a Lloyd’s operation in Europe could form part of a solution but also warned that the market needed to maintain its deep London presence.
“The Lloyd’s market has probably been through harder times but London has to be careful—it needs to make sure it remains the intellectual capital of underwriting,” he says.
Looking forward, Beale believes the situation to be manageable, but the uncertainty does not help.
“We are talking to brokers, clients and all partners to stress that whatever happens we will have access, it is just the mechanism of that access that is in doubt,” Beale says.
As UK-based re/insurers evaluate and react to Brexit, many are already turning their sights further afield, assessing opportunities that exist in other global markets.
Clive O’Connell, partner and head of insurance reinsurance at law firm McCarthy Denning, believes this is the right thing to do but he also believes insurers operating in the London Market must work closely with the UK government to ensure the market remains attractive as a risk transfer hub.
“Opportunities already exist in the non-EU world, particularly in growing economies, and London must now invest in efforts to grow that business to maintain its global dominance,” O’Connell says.
“At the same time, it is essential for the market to work with government and regulators to ensure that the fiscal and regulatory environment is attractive to capital and so that London can develop as a global hub for fintech and alternative capital.”
O’Connell stresses that the single market was created at a time when the European insurance market was already well established, and that London Market penetration, although growing, has not been so significant.
“For example, Lloyd’s receives about the same amount of premium from Canada as from the EU/EEA, and only one-third of this is non-marine, non-aviation insurance, and thus most likely to be hit by a ‘hard Brexit’,” he says.
While O’Connell believes the prospects for the London Market may not be as healthy as they were prior to Brexit, he also believes they are not as bad as they may seem.
“The future for London’s insurance and reinsurance markets might not be as rosy as it might have been but, with effort and the support of government, the outlook may not be as bleak as it seemed on June 24,” he says.
From a Lloyd’s perspective, Beale also says that while it is taking the implications of Brexit extremely seriously and exploring all options that could help solve any potential problems, the situation is not a big problem for the market.
Beale states that the impact on insurance contracts would occur only after Brexit actually happens—certainly not now, and not when the UK government triggers Article 50 to begin the process.
Second, Beale suggests that Brexit will barely affect reinsurance contracts, and a number of types of specialty business are exempt, including marine and aviation.
The main business lines that would be impacted would be simple insurance business which, she estimates, accounts for around 4 percent of Lloyd’s total gross written premiums.
Ingrid Carlou, director general of Latin American reinsurer Patria Re, supports this view and believes her business will be completely unharmed by Brexit, despite the fact it launched a Lloyd’s syndicate in January this year.
“In the worst case scenario only a limited amount of direct insurance from the EU could be at risk,” she says. “As far as we are concerned, and because we only write reinsurance through our Lloyd’s vehicle, we do not expect the Brexit decision and its eventual outcome to harm our plans.”
Beale believes the risks associated with Brexit go beyond its direct impact on insurance—and at a time of much change and uncertainty in the world more generally—it adds to that sense of instability.
“Power is shifting from the west to the rest and we will see more company headquarters based in Asia. At such a time, something like Brexit gives the sense that we are not in it together. That is a challenge,” Beale says.