Offshore jurisdiction status may strengthen London post-Brexit
London’s position as a reinsurance hub could be strengthened in the medium to long term if the UK government and regulators come to terms with London becoming an offshore jurisdiction again, Peter Allen, partner at Moore Stephens, told Monte Carlo Today.
Allen believes London would need to offer regulatory flexibility, attractive tax treatment and supportive infrastructure in order to compete as a reinsurance hub—but he admits that this change of tone would take some years to come through.
Allen stated that clients fall into four categories when UK re/insurers and brokers are deciding whether they need a post-Brexit contingency plan.
“Some already have an established operation onshore in the EU which can be re-purposed to act as the EU distribution hub in the event that no Brexit agreement is reached,” said Allen. “These are mainly the larger carriers and brokers.
“Others have plans to establish something new or make significant changes to an existing operation. These are all the carriers and some of the larger brokers that are not in the first category.”
Some of the most popular locations are Dublin, Luxembourg, Brussels and different cities in Germany, although he said no consistency was emerging as to which is being chosen.
Some companies are still uncertain what to do, Allen noted, including a number of smaller reinsurance and wholesale brokers.
“Clients generally have concerns about the cost of moving senior executives, choosing a regulator sympathetic to the re/insurance market, and also the direct and indirect tax framework,” he said.
“A few know they don’t have to do anything, because they have no onshore EU business, but they are indeed few.”
As to whether these moves might potentially weaken London as a reinsurance hub, Allen suggested that they could, but his expectation is that they won’t.
“We don’t think a lot of senior professionals will want to move to Luxembourg or Brussels or Frankfurt; the frictional costs of the new arrangements are manageable and pale into insignificance compared with the current level of distribution expenses and the underlying loss ratios,” he said.
Allen noted that while most players have contingency plans, there is a big difference between presenting a plan to the Prudential Regulation Authority (PRA) and actually delivering upon it.
“In particular, there are timescale challenges around the use of Part VII transfers to effect some of the changes,” he explained.
“One specific challenge is for smaller wholesale and reinsurance brokers. Their treatment by EU regulators under the Insurance Distribution Directive (IDD) is currently opaque.”
Over the next 12 months, Allen suggested, a change in dynamic could arise in three ways.
“First, the PRA examines the firms’ contingency plans and decides that in the aggregate they are wholly inadequate. Second, the UK and EU may be able to reach a deal on a long transitional arrangement with forecastable terms, in which case the market can relax. We don’t think that is very likely.
“Third, if the UK and EU are not going to reach a deal, the market will get into gear and start to implement plans,” he concluded.
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