Post Brexit: opportunities and hurdles for the London Market

The UK’s departure from the EU offers opportunities to build a regime that suits the UK’s needs and supports the government’s vision of a global Britain, but the re/insurance sector still needs to know what that looks like in practice.

That was one of the main points from a panel discussion titled “The end of the beginning: how will Brexit affect the London Market in the long term?”. The discussion took place on Intelligent Insurer’s Re/insurance Lounge, an online platform where interviews and panel discussions are available on demand.

The event featured Mike Butcher, head underwriter for Europe at K2 International Europe; Carol Hall, head of European and international affairs at the Association of British Insurers; Nick Pester, group general counsel at Zego; and Scott Farley, director of communications at the International Underwriting Association.

Ahead of the final breakaway from the EU, the insurance industry was as prepared as it could be even though a Brexit deal was not finalised until late December 2020, just before the end of the transition period on January 1, 2021.

However, with many key details still to be decided in terms of “equivalence” for Britain’s financial services industry, which would recognise the quality of UK regulations and aid cross-border dealings, and a UK/EU pledge to draw up a memorandum of understanding (MoU) by March 2021 on regulatory cooperation, it is still unclear whether Brussels will actually issue equivalence rulings.

Hall said Brexit could allow the UK to build a regulatory regime that better fits its needs as well as aiding ambitions for a global Britain. But she added: “We want to know what the new regime will look like in practice. There’s obviously a few reviews under way at the moment.

“Many people are very familiar with Solvency II; we don’t want change for change’s sake as that brings a lot of expense, but equally we’re quite conscious that improvements can be made to Solvency II, and the UK can now grab the nettle.”

Hall highlighted the Financial Regulatory Framework as another area where the split with the EU presents a chance to look at the regime in place and how it can be improved to “make it more globally competitive and more open”.

For example, regulators could be given a primary objective on competitiveness or economic growth, so they are held accountable to that, she said.

Unknown territory

Pester referred to the potential for UK regulatory regime changes in the wake of Brexit as “a slight Catch-22 situation”.
He said that the further the UK moves away from the Solvency II framework and the wider regulatory structures that exist in the EU “the lower the chances that we are granted the equivalence decision”.

The EU is still, for the time being, the UK’s largest export market for financial services, he said, adding: “It’s a little bit like sailing into the unknown.”

Acknowledging Hall’s point that there are opportunities for the UK financial services to become more competitive globally, Pester warned again “we are leaving the shore without really knowing what is ahead of us”.

This, he said, could lead the UK to ending up with a “halfway house” set of regulations, which doesn’t really fit the bill as far as Southeast Asia is concerned—a market that is often referenced when talking about relaxation of regulations and how the UK can be more aligned with that kind of regime.

The UK could be caught between more relaxed regulations and the EU’s stricter framework without any clear path to either, he said.

“It’s a tricky one and I think there’s going to be a long bedding-in period.

“The regulators in both the UK and the EU are not fully prepared because there’s no clear framework that’s been put in place by the UK and EU governments, so there’s going to be a lot of ‘feeling out’ out going on for the next six to 12 months as we come to terms with what this means,” Pester said.

Hall responded, highlighting the March 2021 deadline for the regulatory review MoU.

“We’re waiting to see what this MoU is going to look like.”

However, she said, the March deadline meant that insurers “weren’t expecting anything particularly deep and meaningful in that”.

She added: “If the MOU does at least set a framework where the two sides come together and are able to talk about what changes they’re making and what the reasons are, to develop that dialogue and trust, hopefully that will oil the wheels on some of these things.”

Hurdles

In addition to opportunities, the break from the EU presents new hurdles for London Market insurers and their EU-based peers. Farley explained that initially one of the things firms are grappling with is the different run-off arrangements across the continent.

“They’re having to understand and establish relationships with individual country regulators to make sure they can run off any contracts they still have in that particular country.

“Thinking about the equivalence decision, the main issue there is going to be managing future divergence. Hopefully we can come to an agreement there and have equivalence agreed,” he said.

However, he stressed, it was important to note the limitations that would still entail.

“There is no equivalence for direct insurance or for insurance broking. What the UK would like to see is a system of ‘enhanced’ equivalence, which would cover large multinational risks that are underwritten in the London Market and which should have the ability to be conducted cross-border without too much regulatory interference, as you would expect to see on the direct side.”

Butcher highlighted the “huge amount of cost and effort” that London Market firms have incurred to date as a result of setting up EU subsidiaries and setting up the necessary regulatory approvals related to Brexit.

“That was a cost to get us back to where we were already. The hurdle is to make use of this new regulatory body that we have, this subsidiary, and the people like me who can work for it, and turn that on its head and start to capitalise on the opportunities.”

Butcher said that for him, now based in K2’s subsidiary in Brussels, equivalence was “sort of irrelevant”.

He said there is always a benefit to local distribution, for example, being in Europe—for him being in Belgium—and that opens up new opportunities.

“I have just been speaking to new brokers who approached us because we’re in Belgium. We’ve seen new enquiries. Now we have this subsidiary, it’s an opportunity for our business to explore new teams, new businesses that we can potentially acquire, and to grow in Europe.

“The hurdle is overcoming what was a cost to return us to the usual and seeing what benefits we can get out of that,” he concluded.

To view the full Re/insurance Lounge session click here.