London Market ‘disadvantaged by unsupportive regulator’: IUA
The aggressive growth strategies of emerging re/insurance hubs such as Singapore and Dubai is succeeding in luring reinsurance business from the London Market—a phenomenon that is exacerbating the uncertainty surrounding the UK’s decision to leave the EU, which is also motivating companies to move elsewhere.
Overall premium total for the London company market in 2015 was £21.65 billion ($26.5 billion), down slightly from £22.44 billion ($27.5 billion) in 2014 and £24.13 billion ($29.6 billion) in 2012, according to the 2016 London Company Market Statistics Report by the International Underwriting Association (IUA) of London, unveiled just before this conference.
Competitive market pressures and company reorganisations are among reasons for the trend, along with exchange rate fluctuations and an increased use of Lloyd’s platforms, the report said.
Other hubs globally are also becoming more sophisticated and are attracting specialist business and reinsurance business that might in the past have come to London, said Dave Matcham, chief executive of the IUA. Such hubs include Singapore, Dubai and Miami, he said.
“In addition, more business is being written locally, further weakening London as a re/insurance hub. Companies are reorganising their business and moving it away from London to be controlled locally—a phenomenon partly driven by an increase in protectionist regulation,” Matcham said.
“It’s certainly in jurisdictions where the regulation locally has been tightened to preserve and grow the local market and it makes it harder to do cross-border reinsurance,” he added, noting that this does not apply to insurance business.
London may also be disadvantaged compared with other jurisdictions because it is not supported by its regulator.
“At some of these hubs the regulator and the business development team work together. They want to grow that market, but that’s not an objective within the UK Prudential Regulation Authority, which the London Market Group certainly called for in stronger terms,” Matcham said.
In addition, London is likely to lose business volume due to uncertainties around Brexit. In particular, overseas companies using London as a hub to operate in Europe may relocate to the continent to make sure to retain their passporting rights.
“The most immediate impact would be for companies that have chosen London as a hub for single market access; they are discussing their contingency plans already,” Matcham said. “We know that some are looking at other centres and that Dublin is becoming quite attractive as a place to consider for reinsurance,” he noted.
For the London company market this could mean losing £2.66 billion ($3.26 billion) gross premium, or 17.5 percent of the total written in London in 2015, Matcham said. This is the volume accounted for by European business excluding UK and Ireland.
“That to my mind would be the first number that could potentially be lost to the market,” Matcham said.
With the prospect of Brexit, IUA members are evaluating a number of options to make sure that their clients continue to receive the service and contractual renewals and support in their business relationships.
“I know that a couple of companies are at an advanced stage in forming themselves somewhere else for the EU business,” he added.
The total that could be directly affected by a change in rules governing UK participation in the EU single market and its financial services passporting regime is around £7.34 billion ($9 billion), according to IUA.
This ‘Brexit total’ includes £1.36 billion ($1.67 billion) of European premium written in London by firms which are either headquartered in the UK or have a parent company headquartered in a third country and are using their London office to access EU business. In addition, there is a further £5.98 billion ($7.33 billion) of international business written in London by firms with a parent company or principal European base located elsewhere in the EU.
The amount at stake is hard to quantify because it goes two ways, Matcham noted. There are German and French wholesale companies operating via branches in London which might have to become regulated as a branch or subsidiary in the UK depending on the outcome of a Brexit deal and this could potentially add business to the London company market, he explained.
Competition from other re/insurance locations is adding to a number of difficulties the sector is already facing, such as the current soft market. Unfavourable market conditions could result in either more disciplined underwriting or underwriting at lower rates, Matcham suggested.
“There are many elements of a perfect storm at the moment and Brexit just added another cloud to it. You have challenging market conditions, robust regulation both locally and protective regulation internationally, you have clients who prefer to go local now rather than using London—and they can go local because there is now a sophisticated market close to them. It’s a challenging time for the market,” Matcham concluded.
