Brexit boosts costs for re/insurers, creates opportunities for 2017

While the UK vote to leave the EU has shocked London with its large internationally-oriented financial services sector, it also may create some opportunities for the insurance industry.

“Brexit will continue to be a prominent topic for the insurance industry during 2017,” said Chris Waterman, EMEA head of insurance at Fitch Ratings. “Not only will insurers be subject to ongoing bond and equity market volatility, but several UK commercial non-life insurers that currently conduct cross-border business with the EU through passporting provisions are likely to look to set up subsidiaries in the EU during 2017, before passporting is phased out,” he explained.

After a majority in the UK surprisingly voted in favour of leaving the European Union in a June referendum, the re/insurance sector in the UK has been particularly worried about the possibility of losing its passporting rights. The mechanism provides a company authorised in one member state the ability to conduct cross-border business without being required to apply for any additional authorisation or hold assets locally. Official Brexit negotiations with the EU are expected to start in 2017.

Frankfurt, Paris and Dublin have been lobbying to attract business from London. “The Irish insurance regulator has already confirmed that it has increased employee numbers by more than 25 percent in 2016 and expects a further increase as a result of a rise in the number of applications from insurers to establish operations in Ireland, following Brexit,” Waterman said.

French regulators have also announced measures designed to woo British businesses to relocate to Paris in preparation for a ‘hard’ Brexit. “With the process for the UK to leave the European Union likely to start in 2017, re/insurers that do not currently have a subsidiary in a non-UK, European Economic Area (EEA) country are investigating their options,” said Yannis Samothrakis, partner at law firm Clyde & Co.

Recent initiatives have positioned France as a credible alternative to more obvious contenders such as Ireland, Luxembourg and Malta, Samothrakis believes. In an unusual move, the French financial markets regulator (AMF) and the banking and insurance supervisor (ACPR) issued a joint press release promising red carpet treatment to anyone wishing to establish an insurance company in France post-Brexit, he noted.

For existing activities already supervised in the UK, the licensing procedure may be simplified and speeded up by using documents already available in English, such as forms that have been submitted to the supervisory authorities in the UK, and papers concerning French branches whose business would be taken over by the subsidiary firm. In addition, an English-speaking contact is to be appointed to guide applicants through the procedure starting with the pre-authorisation period and to provide all necessary information to ensure the smooth processing of the application, Samothrakis explained.

Additional factors make France an attractive choice: a fairly sound and stable insurance and reinsurance regulatory framework, a qualified workforce, and the fact that key actors are all based in one place, Samothrakis noted.

For companies moving business from London to other locations, this will mean additional costs, Waterman said.

Jeremy Brazil, director of underwriting, Markel International, said that “there’s going to be a lot of hard work and management time involved in tracking the process and planning our responses to the possible outcomes. And when the outcomes for the insurance industry crystallise, there will be a lot to do to make the right things happen.”

Andrew Holderness, global head of corporate insurance group at Clyde & Co, believes that Brexit will act as an additional trigger for M&A. “Many businesses will be considering transactions to create a platform within the EU so that they can continue to access business that might be harmed if passporting rights are rescinded,” Holderness said.

But the uncertainty of what Brexit will mean for London as an insurance hub and the business exodus it has triggered may also motivate the UK re/insurance sector to build on its strengths and innovate.

One opportunity may be the creation of a market for insurance-linked securities (ILS). In September the UK government unveiled plans to implement an ILS framework in early 2017. 

To bring the government’s plan into effect, two consultation papers have been published: an HM Treasury consultation on the Risk Transformation Regulations 2017 and the Risk Transformation (Tax) Regulations 2017. These will create the legal and tax framework to bring ILS business onshore. There is also a Prudential Regulation Authority (PRA) consultation on a Supervisory Statement that sets out guidance on the regulation of Insurance Special Purpose Vehicles (ISPVs) used in ILS transactions. 

“The publication of the draft Risk Transformation Regulations 2017 and associated draft regulatory materials in late November was warmly welcomed by the London insurance market as giving very positive support for the market’s growth agenda, the importance of which has only been heightened by the Brexit vote,” said Stephen Browning, partner at Clyde & Co.

ILS regulation will be a bellwether for London’s competitiveness in 2017 and beyond, Browning believes. UK regulators must get it right if the London Market is to innovate successfully post-Brexit, he said.

Another opportunity for London as an insurance hub after Brexit may be the modernisation of the London market.

The London Market Target Operating Model (TOM) has been set up with a number of initiatives to modernise the London Market and help it overcome the deficiencies revealed in the London Matters report report by the Boston Consulting Group.

The report showed that the London Market is falling behind in reinsurance premium growth compared to other hubs such as Zurich and Bermuda, and losing market share as a consequence. It also showed that the London Market was missing out on opportunities in high growth regions such as Asia, Latin America and Africa, where its market share was declining.

As part of TOM, on July 11 the London Market Group (LMG) introduced a digital platform called Placing Platform Limited (PPL) that allows brokers and underwriters to exchange information.

The Target Operating Model forms a central component of the modernisation, and over the next 12 months we should see further enhancements in efficiency and overall market responsiveness, said Iain Bremner, managing director at Barbican Managing Agency.

The aim is to allow underwriters to focus more on the core aspects of their role by facilitating advances, such as one-touch data capture, to help reduce duplication inefficiencies and bringing about greater centralisation of administration capabilities, Bremner explained. We are already seeing the benefits of the new PPL electronic platform, and as this is rolled out further across other lines of business, we would expect this to further boost the transactional capabilities of the market, he noted.

“This modernisation drive is intrinsically linked to the ability of the market to continue to attract new business,” said Bremner.

“Brexit has of course raised concerns over whether London can maintain its international appeal, but it should be acknowledged that at a time of EU-wide uncertainty, the stability of the London brand could actually make it a beacon for international insurers,” Bremner added.

In total senior executives from companies including Swiss Re, Argo, AM Best, Moody’s Markel, Advent, Barbican, Brit, Ed, Fitch, S&P Global Ratings and Willis Re participated in the piece looking forward to 2017. To read the full transcript of their thoughts and comments, please click here.