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Categorized | Insurance

City’s insurers rush to cover Brexit bases


Posted on September 29, 2016

©FT

In April this year, after months of careful consideration, planning and number crunching, insurer Beazley shifted its headquarters from Dublin to London. The move would, executives said, make Beazley more efficient — partly because there would be less to-ing and fro-ing between the two cities.

Just two months later the UK voted to leave the EU, throwing into doubt the ability of companies to access the single market from a London base. The result has raised a whole raft of questions not just for Beazley, but for the city’s entire insurance industry.

    “As the dust is settling, people are realising the . . . complexity of what has happened,” said Stephen Catlin, deputy chairman of XL Catlin.

    Passporting — or the use of single market rules to access one member state from an office in another — is “the biggest issue by a million miles”, according to Jonathan Burdett, a Deloitte partner.

    For life insurance companies, the problems are not so serious. Their markets are still driven by local products, local preferences and local rules. Those life insurers that operate in overseas markets tend to do so via fully fledged subsidiaries, so make little use of passporting. Aviva, for example, has subsidiaries in France, Italy and Spain. Overseas insurers operating in the UK life market also do so via fully regulated subsidiaries.

    Analysis

    The City’s special relationship with EU finance

    Banks who use UK as a gateway to EU have more than £7tn of assets and make annual profits of more than £50bn

    In property and casualty insurance (P&C) the situation is more complex, especially for the wholesale and commercial insurers in what is known as the London market. This specialist corner of the insurance world makes up a big chunk of London’s financial services industry. According to London Matters, a 2014 report, the London market employs 34,000 people and contributes 20 per cent of the City’s gross domestic product.

    The EU makes up between 10 per cent and 20 per cent of London premium income for some of these insurers. While it is not as big a market as North America, it is not a region that they are prepared to dismiss lightly.

    There are some heavyweight names involved, from European groups such as Allianz, Axa and Zurich, to US companies such as AIG.

    This market uses passporting extensively. Zurich, for example, has a Dublin base for its P&C business and passports into London from there. AIG, on the other hand uses London as its European base and takes advantage of passporting to access other EU markets.

    Registered insurers chart

    Some insurers have ready-made solutions if passporting were to disappear. Beazley, for example, kept a subsidiary in Dublin when it moved its HQ to London. And many of the large continental insurers that passport into London from elsewhere could potentially make greater use of subsidiaries that already exist in the city — Zurich has a UK-based subsidiary for its life insurance operation, for example.

    But that is not the case for everyone. Many big global insurers, from AIG to Japan’s Tokio Marine, have based their European operations in London and passport into the EU from there. A raft of London based insurers have the same problem.

    The industry is lobbying hard to keep full passporting rights but insurers are also making contingency plans. For most, this will involve setting up a subsidiary in another EU country to act as a new base.

    “They could gamble and wait for a trade deal, or explore other EU jurisdictions for a subsidiary,” said Dave Matcham, chief executive of the International Underwriters Association, an industry group.

    The big question they are addressing now is where to go.

    “We are looking at wherever we have an office now, plus Malta and Luxembourg which have good regulatory structures,” said Bronek Masojada, chief executive of Hiscox.

    written premiums chart

    Dublin is likely to be a popular choice. There is already a thriving insurance industry there, which would make recruitment easier. The language, legal structure and proximity to London also work in its favour. Insurers are also looking at France, Germany and the Netherlands, which have large domestic insurance industries.

    Much will depend on local regulators’ attitudes to the new subsidiaries. “The issues for any company which chooses to establish a new subsidiary in another member state to take advantage of passporting rights are how many people you would need to put into the new subsidiary and how much risk you would need to retain there,” said Geoffrey Maddock, partner at law firm Herbert Smith Freehills.

    “The subsidiary couldn’t just be a post box. It has to have the infrastructure for a Solvency II system of governance, including local actuaries, underwriters, compliance staff and executives. In theory everyone should apply the same rules but some regulators are easier to deal with than others.”

    Global commercial insurance chart

    Insurers are also grappling with the issue of timing, asking whether they can afford to wait for a political agreement before they act. “It often takes a year to 18 months to set up a subsidiary,” said Mr Burdett. “Insurers would ideally set up shell companies and then capitalise them later if they need them or obtain provisional approvals. It is not clear if regulators will allow that.”

    “In a game of brinkmanship where decisions get made late in the day, we’ll not be able to wait for a decision. We’ll have to have something in place,” said Charles Franks, chief executive of Tokio Marine Kiln, the Japanese group’s London unit. “We need to give [clients] confidence that we’ll still be there.”

    However they choose to run their EU businesses, the insurers are confident there is a strong future for the insurance industry in London.

    “If you look at the people and expertise in London, there is nowhere in the world that competes with that, and that includes New York,” said Mr Catlin. “Nobody is going to be able to replicate that easily.”

    For some, Lloyd’s is the only route into the EU

     

    London’s wholesale and commercial insurance industry is centred around Lloyd’s, the 328 year old market where insurers and brokers meet to arrange policies. Lloyd’s uses single market access extensively, allowing its brokers and underwriters to service EU clients directly from London. For some of the insurers, Lloyd’s is the only route into the EU.

    The market lobbied heavily for a remain vote and is now pushing hard for full passporting rights. “If we don’t have single market access, then it will obviously affect the amount of business we do with the EU. Our contingency plan would call for us to write EU business onshore in the EU,” said John Nelson, Lloyd’s chairman. “From our point-of-view, it is clear cut that the best option is passporting.”

    But like the other residents of EC3, London’s insurance district, Lloyd’s is busy making contingency plans. If passporting disappears, Lloyd’s has two options. The first is to set up a single subsidiary somewhere else in the EU which could then be used as a base. Lloyd’s already has a similar arrangement in China. The other option would be to set up a branch in every country in which Lloyd’s operates.

    Experts say that Lloyd’s position is complicated by the fact that it is a market rather than a company, so negotiations with other EU jurisdictions could be more difficult. They add that there is a risk that if it takes Lloyd’s some time to sort out its post-Brexit structure, some of the insurers and their clients might choose to do their business directly instead of via Lloyd’s.

    Nevertheless, Mr Nelson is confident that it can overcome the hurdles. “Brexit is not a huge threat but it is something we have to deal with.”