By Dave Matcham, CEO, International Underwriting Association
Ever since the UK voted last June to leave the European Union, both the UK Government and EU negotiators have expressed a desire to sign an ambitious free trade agreement that minimises tariffs and regulatory barriers to cross-border business, including for insurance and reinsurance.
The London Market Group, which represents companies in the International Underwriting Association (IUA), Lloyd’s and brokers, is pushing strongly a right for UK-based insurers and reinsurers to accept business introduced to them by brokers from the EU. At the same time, a reciprocal right must be offered for EU carriers to do business in the London Market, unimpeded by additional capital requirements.
A free trade deal will not be easy. If no settlement is reached, the default position would be for the UK to fall back on its membership of the General Agreement on Tariffs and Trade and the World Trade Organisation (WTO). The prospect of trading advantages for insurance, and financial services generally, under the WTO General Agreement on Trade and Services (GATS)- annex, is far from certain. A “prudential carve-out” allows regulators to take any prudential measures they deem necessary to protect policy holders and ensure financial stability.
A new trade agreement between the UK and EU, therefore, is by far the best outcome to the Brexit negotiations. This would enable the London Market to continue providing uninterrupted cover to clients across the continent. Specifically, the London Market Group’s Brexit Roadmap calls for regulatory equivalence under Solvency II to be agreed with prudential regulatory regimes, so that companies can continue to be supervised by their home state.
An early agreement on an implementation period to move to a new deal is also to minimise business disruption. Uncertainty over whether insurance policies will be enforceable is already affecting the decisions of insurance clients, and current market access rights should be maintained in any interim period.
Many clients require policies with terms of three years and longer, which means that they now need certainty beyond March 2019, the scheduled deadline for Brexit. Even renewals for single year policies are only a matter of months away. This pressure of time is driving the decision-making of the industry. Insurance brokers, UK insurers and EU insurers in London are now considering the future structure of their organisations and making contingency plans that will need to be implemented in case no deal trade is struck.
Such plans include the creation of separate subsidiary companies in various EU member states. No single destination has emerged as a dominant choice with organisations generally opting for locations that put them close to their customer base and fit best with their existing global structures.
So far, the Brexit debate has, of course, raged most fiercely in the UK. Yet European companies will undoubtedly be significantly impacted by a change in the UK’s relationship with EU. Of the IUA’s 47 member companies, only five have headquarters in the UK. One-quarter of the IUA’s membership is accounted for by firms with head offices in other EU member states, including eight from Germany.
Clearly, a comprehensive trade deal, establishing mutual recognition between insurance regulators, is in all our interests. The London Market is a vital European and global insurance hub, providing risk managers with access to a concentration of expertise and capital that is not available in local markets. As negotiations begin in the coming months, it will be important for politicians on both sides of the table to keep this firmly in mind.