No need for London and UK insurers to panic over Brexit

The UK will retain its passporting rights into Europe as it negotiates its exit from the EU that will take at least two years. The UK's financial services regulator has been an avid advocate of Solvency II, Europe's capital adequacy and reporting regime for insurers. Many in the UK believe that it has been guilty of 'gold-plating' the regime. It would be difficult for the European Insurance and Occupational Pensions Authority (EIOPA), politicians in Strasbourg or bureaucrats in Brussels therefore to argue that the UK does not qualify for equivalence to Solvency II along with Bermuda, Switzerland and Japan. But the threat of the loss of passporting rights if the UK fails to negotiate a decent exit agreement with the EU is a serious consideration that international insurers and reinsurers based in London will have to watch closely.hideIt is important to note that while Europe does provide a decent level of business for UK insurers it is not the lifeblood of the London market. The US remains its biggest source of premiums by far. Vigorous investments in new platforms in Asia, Latin and Central America and Dubai by Lloyd's over recent times strongly suggests that the market sees its future further afield than across the channel. One positive for the London market is that the many US, Asian and European firms with operations at Lloyd's and in the wider London market are not there simply to access mainland European business. They are in London to access international business that comes to the UK capital via the Lloyd's global licensing system and because of the huge and highly skilled labour pool and service providers based in London. Brexit will inevitably lead to complications, uncertainties and frictional costs for international insurers that are based in London. But one has to ask whether Japanese insurers Mitsui Sumitomo and Tokio Marine, for example, now regret their decisions to significantly extend their global footprint through the acquisition of leading Lloyd's insurers Amlin and Kiln? Only five months before the UK electorate shocked the world by voting in favour of Brexit, Amlin announced the cross-border merger of two of its insurance company subsidiaries - Amlin Europe NV and Amlin Insurance (UK) - to create Amlin Insurance SE, a European corporate entity (Societas Europaea) domiciled in the UK. Amlin continues to trade through its existing European offices and branches in the Netherlands, Belgium, France and Germany. Tokio Marine Kiln (TMK) has offices in France, Germany, Italy, the Netherlands, Belgium and Spain, as well as its London and UK regional offices. But TMK is much more than just a European insurer. In May, for example, it launched its first General Aviation Consortium on the Lloyd's Asia platform. At the end of last year TMK also announced that it had signed a Memorandum of Understanding with the People's Insurance Company of China Property and Catastrophe Company Limited (PICC P&C) to provide intellectual property (IP) infringement liability insurance in China. TMK explained that the agreement ensures that PICC's domestic Chinese clients will have access to enhanced IP infringement protection when they operate overseas. TMK provides underwriting expertise and product structuring assistance to PICC through the Lloyd's Insurance Company (China) Ltd (Lloyd's China) as part of a non-exclusive licence agreement. So London's position as a leading international insurance and reinsurance hub is not going to be wiped out by the Brexit vote. But some experts do feel that the loss of passporting rights is a real possibility. Jonathan Howe, UK insurance leader at PwC, said: "The Lloyd's & London market and general insurance market make extensive use of passporting. The loss of these rights could see insurers being forced to restructure and facing large operational, regulatory and tax costs as they adapt to such a change. "Many non-UK insurance companies from areas such as the USA and Asia currently use the UK as their European headquarters and as a 'gateway' into Europe through EU/EEA passporting. There is a real risk that these rights could be eliminated and insurers will be thinking about the best location for their bases in the future." Credit rating agency Standard & Poor's certainly does not seem to view Brexit as an immediate threat to the UK insurance market. It said that the leave vote is not expected to lead to rating actions on UK insurers and that the insurance sector is less exposed than the rest of the financial sector. "While representing about one-third of the UK's very substantial financial services net export surplus, the insurance sector is far more reliant on trade with non-EU countries - especially the US. The sector is also a very limited recipient of inward investment," stated S&P. While Moody's has downgraded some UK life insurers its ratings on general insurers remain unchanged. S&P does not even think that the potential loss of passporting for London insurers would be a disaster. "The nature of any future trading relationship between the UK and the EU is yet to be established. However, even in the absence of any trade agreements or passporting rights, we believe that UK insurers operating in the EU could, through appropriate planning, continue their businesses largely uninterrupted. The same would apply for EU insurers who currently trade in the UK through branches," stated the agency. One negative effect of the vote could be a period of uncertainty while treaties and other arrangements are negotiated between the UK and the EU that could "weigh on" insurers' investment returns and possibly on the rate of future economic growth, pointed out S&P. "However, we do not now believe that these potential issues are likely to lead to immediate rating actions on insurers," it added. Thomas Dawson, a New York-based partner in transatlantic law firm Drinker Biddle, said that the London market has no reason to panic over its strong position in the huge US insurance market. "From a US insurance regulatory perspective, the 23 June Brexit vote has little immediate impact for re/insurers domiciled in both the UK and in EU member states. Insurers already listed by US regulatory bodies to write insurance on a surplus lines basis are unaffected by the Brexit vote," he said. Mr Dawson pointed out that the ability to write reinsurance in the US market has always been open to reinsurers worldwide, subject to collateral requirements. "Relaxation of those collateral requirements - the still-evolving 'certified reinsurer' status - is open to reinsurers domiciled in approved jurisdictions (the UK, France, Germany, Ireland and Switzerland among them) - and so is unaffected by the Brexit vote," explained Mr Dawson. The lawyer added that many in the industry will be monitoring progress of ongoing US-EU 'covered agreement' negotiations and expect the UK government to begin bilateral 'covered agreement' US-UK talks, either standalone or as part of a wider trade agreement. Another interesting angle is the London market's ongoing discussion with the UK government about the creation of an Insurance-Linked Securities (ILS) market in London. Mr Dawson suggested that badly needed innovation in the insurance market could actually benefit from Brexit. "Industry will also be watching with great interest as commercial innovation in the London Market - with respect to traditional products, ILS/capital markets developments, use of blockchain technology, etc - may now proceed without having to conform to EU-wide norms," he said. Leaders of international insurers with big interests in London and mainland Europe that commented on the vote obviously attempted to convey a message of being in control and on top of the situation. Mike McGavick, CEO of XL Catlin, sought to reassure brokers and customers that there is no need to panic. "While there are now many questions to be answered and much for the British government and people to address, at this time I wanted to confirm for you that this is an outcome for which we are prepared," he wrote. "Over recent months we have worked across the business to understand how a vote to leave the EU may impact XL Catlin, and in particular our UK and European operations. Now that this historic vote has taken place, we will be working on the various operational and administrative aspects relating to the UK's withdrawal from the EU that is expected to be a long and complicated process. As we continue to understand the ramifications of this decision, we will keep you updated as needed. Fundamentally, we believe our strong global network and footprint keeps us well-positioned to continue delivering for our clients," continued Mr McGavick. XL Catlin received approval from shareholders to shift its place of incorporation from Ireland to Bermuda, which was recently granted equivalence and therefore passporting rights into the EU, last week. Mr McGavick said: "Given, in particular, our long-standing and substantial operations in Bermuda that have been bolstered by the Catlin Group Limited acquisition, and Bermuda's position within the international (re)insurance market, including Bermuda's recent achievement of Solvency II equivalency, we believe a change in the country of domicile of our parent company to Bermuda will be advantageous to the company and its shareholders." QBE said that the referendum outcome may require a "revised approach" to the approximate £500m of insurance and reinsurance premium that it currently sources from EU member countries written via branches of UK regulated entities under current EU passporting rules. The Australian insurance group said that should EU passporting rules not be preserved, QBE will have to renew this business into newly established licensed EU entities. But the group said that it does not see this as a big problem. "The exit transition timetable is expected to take a minimum of two years. This period provides ample time for any requisite administrative transition and to ensure our service commitments to QBE's European customers are uninterrupted. Thus our ability to source business from EU member countries remains unchanged," it said. Accordingly, QBE does not anticipate any material impact on its day-to-day insurance operations as a result of the UK's decision to leave the EU.

No need for London and UK insurers to panic over Brexit

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