Martin Bixel - 04 Nov - 0 Comments
The government’s Brexit white paper has given us important insights into how it will approach the upcoming negotiations. It was particularly pleasing to see that the financial services industry – a major driver of the UK economy – was considered a priority. A key element of that industry is the London insurance market.
It’s to London that businesses across the globe come to buy the highly specialised commercial insurance which is so vital to their enterprises. Without this insurance planes would not take off, ships leave port or infrastructure projects break ground.
Nobody does this better than London, so it was good to see that the specialist insurance industry merited a specific mention in the white paper. The easy access to EU markets that London currently enjoys makes it a major draw for customers all over the world. They come to take advantage of London’s unique ability to provide them with global policies that cover their highly complex enterprises, all done from one location.
This business contributes £60bn a year to the UK economy, so the Brexit negotiations are crucial. If UK-based insurers and reinsurers cannot carry on business in this large market on Britain’s doorstep, then London becomes a materially less attractive location not just for EU customers but all international investors.
Here are some thoughts on how the negotiations could be approached and the issues that the government should think about.
Firstly, as the London Market Group has pointed out in their Brexit roadmap for the industry, a number of international agreements that are already out there seek to reduce non-tariff barriers for insurance and reinsurance services. Let’s be clear, these agreements do not on their own provide all the answers. We know that the special qualities of the London insurance market will require something new, but there are elements within each of these which could be useful precedents.
These include the recently concluded covered agreement between the US and the EU, which reduces trade barriers for reinsurers in both markets, reduces regulatory burdens and does not require the creation of expensive subsidiaries.
There is also the existing bilateral agreement between Switzerland and the EU for non-life insurers, which has been in force for almost 25 years and significantly limits the capital that needs to move across borders to satisfy regulators. Importantly, it also provides a process to keep the two systems in tune with one another and a way to voice any concerns about the regulatory direction the other party is taking.
Secondly, we need to play to our strengths. The regulatory regime for commercial insurance, known as Solvency II, is completely aligned to EU regulation. It was developed primarily by the UK and is increasingly becoming the industry’s global standard. Given the measures within the Swiss and US bilateral agreements and that the UK is currently compliant with Solvency II, EU regulators could be reassured that UK-based capital would still be available to pay out claims in EU countries and therefore businesses could therefore remain in the UK. This would be a win-win for both the UK and the EU companies that need to access that UK capital.
Finally, it’s this concept of a win-win situation on which we need to focus and, given the interdependence and mutual reliance that exists between the UK and EU in this industry, it seems achievable here. Over £6 billion of the London insurance market’s income is international business written in London by firms with a parent company or principal base located elsewhere in the EU.
To maintain this free and frictionless trade and as part of the new deal, we could offer rights of cross-border access, no capital requirements and home country regulation to EU insurers operating in the UK, allowing them to continue to write business in the UK as they have done for decades. In particular, EU nationals working in the London insurance market, about 2,500 people, should be reassured that they will be able to continue to remain in the UK post-Brexit, whilst new talent should not be deterred from coming to the UK by the uncertainty of their future status.
This would not only protect London’s cluster of capital and expertise, but even more importantly it would send a very positive message to EU investors that they would be able to continue to access the London market, allowing them to retain and bring with them significant inward investment.
No one pretends that this will be easy or that the negotiations won’t be tough, but by using the precedents that exists, focusing on our strengths and crucially accentuating the mutual reliance of businesses in both the UK and the EU on this unique market, I have every hope that we can secure the best possible deal for this truly global UK industry.