With a slight majority of the UK voters opting to leave the EU, it is the view of the Insurance Intelligence Center (IIC) at Timetric that "Brexit" presents unprecedented challenges to London’s position as a global insurance centre.
British, European and global insurers based or headquartered in the UK, faced with the uncertainty surrounding the process of leaving the EU, have launched contingency plans to protect their operational and financial efficiency.
Timetric will closely monitor negotiations, offering in-depth analysis of market conditions, assessing the impact and implications of the different scenarios as they emerge.
London as a global hub
The London market is currently the largest global hub for commercial and specialty risk – handling approximately 10% of global premiums. It has historically been a commercial hub underpinned by trade and the accumulation of capital needed to support the insurance industry.
London is characterised by an unmatched combination of talent, expertise and sustainability for investment. It hosts operations of every top-tier insurer, reinsurer and broker and it is a diverse marketplace employing approximately 50,000 professionals within the insurance sector.
A key part of London’s position as a global insurance hub is the UK’s membership to EU, which grants companies based in the UK passporting rights for business to flow into and from the EEA states.
This enables firms regulated by the Prudential Regulation Authority (PRA) to conduct business in other EEA states without a need to reapply for individual country licensing and is a crucial reason why US and Asian (re)insurers have their European headquarters situated in London.
Furthermore, the EU has negotiated trade agreements on behalf of its members, including the UK, with 55 non-member countries – allowing firms in London to trade at preferred conditions and is currently seeking to complete deals with another 87 countries, including the US.
Impact of leaving the EU beyond access to single market
In February this year, Sean McGovern, speaking as chief risk officer at Lloyd’s, clarified that: "existing agreements to which the UK is a party via its EU membership cover 59% of the UK’s global trade and this will rise to 88% if the EU is successful in its current trade negotiations. With 90% of global economic growth expected to be generated outside Europe over the next 10-15 years the importance of this trade activity cannot be under-estimated."
If the UK were to leave the EU, it will need to try to replicate the trade deals it has in place to ensure barriers for doing business are kept at levels considered attractive by investors. In the inconvenient scenario that negotiations fail to be completed within the 2 year period after invoking Article 50, Britain will face tariffs under "most-favoured nation" rules. While this will certainly not be an ideal scenario, it should not be treated as a disaster.
For some insurance players, the EU regulatory framework could be inflexible and burdensome. Therefore, not being restricted by these regulations could provide them with space for innovation – as well as increase their ability to respond to the constantly changing demands within commercial insurance.
Others consider that a UK outside of the EU will be able to concentrate its trading efforts on producing better deals with thriving emerging economies -an important source of future growth. In both cases, the trade-off is years of uncertainty over how the best possible scenario will play-out.
No short of mid-term upside on sight
It is the view of Timetric’s IIC that any scenario in which the UK leaves the EU, will negatively affect London’s position as a global insurance hub.
Independent of the outcome of the negotiations, we expect that it will take in excess of two years to regain the current attractive and viable trading conditions or to negotiate even better conditions to trade globally.
With no sight of short or mid-term upside or a consistent plan to tackle the leaving process, the UK government will have to renegotiate trading rights with its former partner union and many other key commercial partners in an increasingly weaker negotiating position.
Under these conditions, we expect that UK-based insurance players, with regional and global reach, will act upon contingency plans to restructure their operations in order to maintain capital and operational efficiencies. It is expected that a long period of uncertainty will cause a crisis of confidence between investors and shareholders, adding extra pressure for insurers to seek alternative locations to maintain stability.
Role of Timetric to support your business
Timetric’s IIC will be closely monitoring how Brexit will effect changes in regulatory, tax and capital regimes as well as its impacts on regional economic and political stability in the Eurozone. By covering market, regulatory and company trends within a single platform, the IIC is well positioned to help you understand how the impact of Brexit evolves over time.
Timetric’s IIC regulatory reports provide a single, continuously-updated view on the requirements for establishing and conducting insurance business in each of the EEA states and beyond.
Additionally, Timetric is currently reviewing its market forecasts for the key impacted economies as well as its suite of industry reports that combine industry data, company regulatory returns and expert interviews to provide you with the clearest panorama of how markets are responding to the uncertainties ahead.
Finally, the IIC at Timetric will continue to produce insight reports and conduct in-house surveys, published solely via its platform, to leverage the views of individual market participants in the UK and elsewhere, and assess the impact of Brexit as it develops.