Brexit uncertainty frightens insurers as negotiations on multi-year contracts stall

While insurance leaders have warned that the EU would also suffer from the consequences, the uncertainty caused by ongoing negotiations is already affecting negotiations for contracts that span periods of more than three years.

“Contract continuity clearly is one of the biggest problems,” said Catherine McGuinness, chairman, policy and resources committee, City of London Corporation, at a Brexit event organised by the Policy Forum for London on Feb. 28.

“We are aware that people are taking their own steps to transfer contracts to try to avoid the problem, but that is not going to sort everything out.

“We need to address grandfathering of contracts and ensure that insurance contracts can continue to operate after Brexit,” McGuinness explained.

Many UK-based re/insurers have already started preparing for the scenario wherein they lose access to the EU market. A number have created subsidiaries in the EU, despite the fact that the UK government’s Brexit plan currently includes a two-year transition period.

But as a participant of the event noted, some insurers may be in the process of negotiating contracts that extend to five years—and it is hard to sell a policy which may not work because it is not admitted.

No help elsewhere

The UK government appears powerless to offer much help, and if the uncertainties continue, the industry, trade bodies and regulators must collaborate to decide which steps need to be taken to manage that uncertainty, Richard Knox, director financial services (international), HM Treasury, said at the event.

Despite its importance to the UK economy, the financial services sector has, so far, failed to receive much attention in the negotiations for the future relationship between the EU and the UK. While this seems to be changing, political jousting also seems to have emerged, with the EU’s chief negotiator Michel Barnier stating that he does not believe that financial services can be part of a free trade agreement.

Knox described the delicate situation. “There needs to be a process for establishing regulatory requirements for cross-border business between the UK and the EU. The cooperation agreement has to be reciprocal, reliable and prioritise financial stability, it should enable timely and coordinated risk management on both sides. These arrangements need to be durable and reliable for the businesses operating,” he said.

However, he pointed out, Barnier does not believe that these goals are achievable through a conventional free trade agreement, which has to date limited financial services provisions and is also not achievable through the existing provisions equivalence.

In addition, UK Chancellor Philip Hammond has warned the government could reject any Brexit trade deal that did not include financial services.

For the UK insurance industry there is a lot at stake. “Brexit represents a significant challenge for the London insurance market,” said Christopher Beazley, CEO of the London Market Group.

“A rapid agreement and a transitional period is critical. The London Market works with a huge number of EU clients,” Beazley said.

Approximately £8 billion ($11 billion) worth of premiums emanate from the EU, Beazley noted.

What London needs

McGuinness suggested that what London needs can be summarised in three Ts: transition, trade and talent.

The UK should push for a transition period as close as possible to the status quo, bridging the gap until the introduction of the final arrangements—a period which gives firms time to implement changes.

“We need to be able to ensure continuity in areas such as contracts and data transfers,” McGuinness said. “The most legally sound and stable option is to secure mutual adequacy decisions between the UK and the EU,” she added.

In order to retain its status as the leading global financial centre the UK needs continued access to the best people for the jobs, whether they are home-grown, from across the EU or from the rest of the world.

“London’s reputation is at stake with the approach we are taking to our global talent pool. We are hearing many anecdotes that people no longer feel happy and comfortable the way they used to and that is a message we absolutely want to overcome,” McGuinness said.

Brexit may make it more difficult for UK insurers to increase the diversity of staff that is required to regain market share in high growth markets. Analysis shows th at the London Market’s share of business coming from emerging markets is falling, Beazley said. He believes there is a link between this development and unsatisfactory recruitment processes.

“Non-UK nationals make up 11 percent of the London insurance market, and this is much lower in comparison to other financial services,” Beazley said. “There is an obvious link here between those two statistics.”

While the London Market recognises the challenge and is committed to developing a diverse and dynamic workforce, the sector will need an ongoing immigration policy that enables it to recruit the diversity of talent required to address the decline and attract more business to London from fast-growing economies such as Asia, he explained.

The need to be competitive is underlined in the way that London’s rival insurance hubs have grown over recent years, often at the expense of London’s share.

Within reinsurance, the London Market’s global market share dropped from 15 percent in 2010 to 13.5 percent in 2013 and 12.5 percent in 2015 .

London’s premiums from emerging markets fell from $10.5 billion in 2013 to under $9.5 billion in 2015. This happened while these regions experienced significant economic growth. Asia remains the highest growth market globally but was also the region to which London lost most ground between 2013 and 2015, mainly due to growing regional insurance hubs, most notably Singapore.

Further pressure looms

The extent to which the UK insurance industry will suffer from higher costs due to Brexit and see business moving to the EU will depend largely on what the future arrangements are regarding the ability to write business from within the EU, Beazley explained.

“The impact of our not being able to write the business from London will ultimately lead to greater complexity and likely create higher prices for clients,” he explained.

If London-based insurance participants are having to spend the setup costs of opening an operation within the EU, or if they are having to relocate people, or if they are having to put down capital in those subsidiaries, that is all increasing cost and increasing inefficiency over the solutions that are available today, Beazley noted.

Some arguments strengthen the UK’s negotiating position with the EU. A large number of EU insurers have £6 billion ($8.3 billion) of global premiums via their participation in the world’s largest commercial insurance market by having a presence in London, he added.

“There is rather an obvious mutual interest in maintaining and building on this partnership,” he said.

London has the largest commercial insurance market, larger than the next three combined , Beazley pointed out. London controls $91 billion worth of insurance premiums, accounts for 60 percent of the world’s aviation insurance, for 30 percent of the world’s reinsurance market, and 50 percent of the world’s energy insurance business.

The government is aware of what is at stake. Financial services operate best at scale, Knox pointed out. Fragmentation of markets, whether that arises from new regulatory barriers or lack of confidence about the new arrangements put in place would increase the risks of harm such as increasing costs to households or drive activity and investments to other jurisdictions such as the US or Asia, he explained.

Restricting the access of UK insurers to the EU market may have negative effects on EU consumers. Some UK-based insurers may not write a significant EU portfolio and may decide that the costs of contingency plans such as opening up an EU subsidiary with staff and capital may not be worth it, thereby reducing capacity available to EU-based clients, Beazley noted.

The EU must have an interest in reaching an agreement that delivers contract continuity, McGuinness noted.  “It would be ridiculous for people to have paid their premiums but not to be able to claim on their contracts. It’s in all our interests to find a solution,” McGuinness said.

Barnier is saying there is no space for financial services in the free trade agreement the UK may be looking to strike, and that there is not a single trade agreement that is open to financial services, she noted.

More recently Barnier said that a free trade agreement may include provisions on regulatory cooperation, but that if a country diverges from the EU’s regulatory framework, its firms can no longer enjoy the benefits of a passport to the single market.

A solution may be possible. “We are actually seeking something which the EU itself was pushing for when it was trying to negotiate a Transatlantic Trade and Investment Partnership with the US,” McGuinness explained.

However, time is ticking by for the UK insurance industry, not least because there may be even more challenges ahead. In 2017 a EU ‒US covered agreement was implemented which removes the need for local reinsurance statutory collateral and encourages regulatory cooperation. After Brexit, this agreement will no longer apply to the UK.

America represents over 30 percent of the premiums that flow into the London insurance market. It also accounts for over 90 percent of the world’s cyber insurance premiums of which London takes a leading 25 percent share.

“It is essential that the UK negotiates a new bilateral agreement with the US which mirrors the EU after Brexit,” Beazley said.

Relying on the politicians in charge to find acceptable solutions in time for businesses to deliver might be risky.

“The people negotiating the deal often don’t know how much they rely on London,” said the chair of the Brexit event, Baroness Bowles of Berkhamsted, in her closing remarks.