Mike Holley was on a plane to Germany within days of the U.K.’s vote to leave the European Union, and he says authorities in Hamburg “rolled out the red carpet” in welcome.Holly is chief executive of Equinox Global, a London-based managing general agent specializing in whole-account trade credit insurance.
Soon, his company will have a fully licensed and authorized German firm to serve his EU clients. It will allow Equinox to keep issuing policies anywhere in the 27 countries of the post-Brexit EU, no matter what happens to trade in financial services between Britain and the others.
Equinox, and all London market insurers and brokerages, currently enjoy a privilege known as “passporting.” It lets them report only to the U.K. regulator for all their European operations. It’s the equivalent of the California insurance commissioner deciding New York regulation is good enough to allow New York carriers and brokers to issue policies in his state without reporting to him in an onerous way.
For British brokerages and insurers, including Lloyd’s, the passporting privilege is almost certain to disappear with the U.K.’s decision last June to go it alone, outside the barrier-free single European market of about 445 million people. That will probably happen two years after British Prime Minister Theresa May’s formal notification of Britain’s intention to leave the Union, which she issued in March. When Britain goes, U.K. insurers and brokerages that want to keep selling insurance in Europe will have to find another way.
We may follow Lloyd’s wherever they go, since they have done the groundwork. Lloyd’s is right to be ready. We may have transitional arrangements—it is so uncertain at the moment—but it is not worth the effort of doing something that may be unnecessary.
Greg Collins, CEO, Miller Insurance Services
Given all the pre-vote panic and the post-vote posturing, it’s easy to get the impression Britain’s referendum choice could deliver a fatal blow to London’s international insurance market. However, such predictions were clearly overblown. Many companies are executing contingency plans, but for most, business as usual will soon resume.
A consensus has settled over the market: Brexit is not a massive problem. But it is certainly inconvenient.
Greg Collins, chief executive of London wholesale specialist Miller Insurance Services, says he and his firm feel “no sense of panic or concern at all about Brexit.” The brokerage has adopted a watch-and-wait stance rather than rushing to open a subsidiary in the EU. Miller realizes about 15% of its business is from EU countries outside the U.K., including facultative insurance placements for continental carriers, and the proportion is growing.
To export that business to U.K. reinsurance markets including Lloyd’s, it may require an EU-supervised company. “We may follow Lloyd’s wherever they go, since they have done the groundwork,” Collins says.
“Lloyd’s is right to be ready. We may have transitional arrangements—it is so uncertain at the moment—but it is not worth the effort of doing something that may be unnecessary.” He believes establishing an EU subsidiary will be very straightforward. Many international carriers already have EU-licensed entities outside the U.K. “I don’t think it is an existential threat to the London market,” Collins adds. “There’s little doubt that all the main underwriting decisions will still take place here in London.”
Where Will They Go?
Brokers are watching, waiting, exploring whether to follow.
Trade with the EU currently accounts for about 11% of Lloyd’s gross written premium and is conducted under the existing passporting regime. “In theory, anything that restricts our access to the EU could have an impact on that business,” says Stewart Todd, a spokesman for Lloyd’s, “but I wouldn’t say we forecast a fall in revenues, because we have been working on contingency plans since the referendum was announced.”
That work stepped up considerably after the vote, Todd says. “The aim for us in terms of dealing with a post-Brexit landscape was always to ensure that our customers could continue to access the EU market seamlessly,” he says, “and that European clients could access Lloyd’s so as not to affect their ability to conduct business.”
Lloyd’s has been assessing its options since June 2016, including the establishment of multiple branches in several EU countries or an EU-supervised subsidiary. Late in the year the market announced its intention to open a licensed EU entity. “That’s the best way to ensure we can continue to trade with the EU, and therefore that was the plan we decided to focus on,” Todd says.
“The branches model would be expensive and would essentially restrict our access to the traditionally stronger European markets of France, Germany, Spain, Italy and the Nordics. To run that model would require branches in those specific territories and the associated costs, resources and regulatory framework to work through. Given that, we are focusing our efforts on the subsidiary model.”
Widespread reports in April suggested the shortlist for the Lloyd’s jurisdiction had been pared to Frankfurt and Luxembourg. Todd told Leader’s Edge Lloyd’s was holding discussions with the countries it was considering and was exploring details of how the new model would work from the perspectives of staffing, resources, regulation and tax just days before it announced that the subsidiary will be located in Brussels, Belgium, the effective political capital of the European Union. Chief Executive Inga Beale told reporters that the number of employees located in the subsidiary would be “tens, not hundreds.” The decision appears to have been motivated by attractive proximity to the regulators and legislators who lay down the European Union’s insurance rules.
Belgium will also allow Lloyd’s to cede the lion’s share of its premium—perhaps 100%—back to London. Lloyd’s is still examining how best to channel business into the subsidiary from the Lloyd’s-based underwriting companies that operate Lloyd’s syndicates.
Many brokerages had been waiting to see how Lloyd’s would handle Brexit before making any major plans. “Those who conduct business with the EU have said they are looking to see what solution we put in place, and I think that also goes for coverholders in the EU,” Todd says. “They are waiting to see what we do to enable them to continue conducting business with us. Will there be costs? Almost certainly, but still, the question for us is: can we make this work in a way that means it is still an attractive proposition? We have been talking to the market as this process has developed, so we believe that they are in step with us and can see the benefit of this approach for them.”
Dave Matcham is chief executive of the International Underwriting Association, the trade body that represents London’s wholesale insurers and reinsurers that operate outside Lloyd’s. “The impact of Brexit on individual IUA members will vary across companies according to the many differences in existing corporate structures and international operations,” Matcham says. “Without a retention of the market access provided by passporting, however, some companies may be forced either to set up branches in each EU member state or establish a new subsidiary in one member state and utilize passporting from there.”
AIG Europe, an IUA member, has opted for the latter course. It has revealed plans to open an insurance company in Luxembourg, a small EU country with an outsized financial services sector, to “ensure continued smooth operation of its business across the European Economic Area and Switzerland once the U.K. leaves the EU,” the global giant said in a statement. It will retain a U.K. company for British and London-market business.
AIG Europe chief executive Anthony Baldwin is certainly not writing off post-Brexit Britain’s importance. “AIG sees opportunity in the ongoing resilience of the U.K. insurance market,” he says. The company has about 2,200 employees in London and 2,700 elsewhere in Europe.
Another of the handful of companies to announce plans so far is Hiscox, the speciality London insurer that branched out to build an international retail operation. “Our European business is currently written by our U.K. insurance company and on Lloyd’s paper, so we need to form a new insurance company in the EU,” chief executive Bronek Masojada says. “We’re currently looking at Luxembourg and Malta. The main considerations for us are somewhere with a long-term commitment to the EU, with a stable regulatory environment, where the regulator is welcoming and where we can speak to the regulator in English.” Masojada says the new office will support the dozen European offices Hiscox already operates, which wrote £175 million ($217.23 million) of premium in 2016 and employs 300 people.
“Any additional headcount will be incremental,” he says. “We expect to continue to grow the European business around 8% to 10% every year. While there will be a short-term capital inefficiency for us, it will not be material, and we will simply move capital from the U.K. carrier into the new EU entity as we write more European business. For Hiscox, this is a structural issue, not a strategic issue. I don’t want to underestimate it, but it’s a largely mechanical process with lawyers and accountants at work.”
For Hiscox this is a structural issue, not a strategic issue. I don’t want to underestimate it, but it’s a largely mechanical process with lawyers and accountants at work.
Bronek Masojada, CEO, Hiscox
Officials in various EU countries have been actively wooing British firms. Dublin, which has a relatively large international insurance sector built on London’s back and oiled, from about two decades ago, by light regulation and an attractive tax rate, was an early and obvious option for many U.K. operations seeking an EU subsidiary. Five insurers have reportedly applied for Irish Central Bank insurance authorization in the city, and another five intend to, but since regulators require substantial operations be established, rather than simple fronting companies, others have pulled back.
“A key requirement for authorization is substance in Ireland,” Sylvia Cronin, Ireland’s chief insurance supervisor, recently told a KPMG audience. “The applicant must demonstrate to us that the business will be run from Ireland and that decision-making happens here.”
Lloyd’s dispatched a delegation to Dublin after Chief Executive Inga Beale met at Davos with Enda Kenny, at press time the Irish taoiseach, or prime minister, but the market later ruled out locating its EU subsidiary in the city.
Apparently, the scale of the operation Lloyd’s wishes to establish would be insufficient. “We don’t want to set up a lot of infrastructure in a country,” Beale told a London insurance Breakfast Club meeting in January.
Tiny Luxembourg—officially a “Grand Duchy”—also had been in the frame for Lloyd’s since it is less inclined to demand that refugee insurers and brokerages migrate scores or hundreds of employees, but in the end Lloyd’s chose Brussels. [See sidebar: Lloyd’s and Brexit.]
Holley is watching Lloyd’s moves. Equinox Global’s business is placed entirely in the Lloyd’s market, and its operation must be compatible with Lloyd’s choices. But within the EU, location doesn’t matter. So far, at least, Equinox Global is the first London company known to have chosen a German location for its EU-licensed passporting company. But for Equinox the move will have other benefits. “We get something back,” Holley says. “The German regulatory environment for an MGA will be more favorable than the U.K., which I expect will be a gain. Commercially, there’s a gain. Our German customers appreciate our setting roots in their country. Until now, the business was structured in a way most convenient for us. Brexit forces us to adopt a structure most convenient for our customers.”
Until now, the business was structured in a way most convenient for us. Brexit forces us to adopt a structure most convenient for our customers.
Mike Holley, CEO, Equinox Global
Equinox moved incredibly quickly, but some in the market worry that EU subsidiaries may take too long to set up or could run into roadblocks. One brokerage is proposing a work-around solution. Marsh UK told The Insurance Insider it has put together a “bridge solution” involving fronting arrangements with a group of EU-licensed insurers. The brokerage’s U.K. and Ireland CEO, Mark Weil, told the newsletter that the arrangement would mean clients “don’t need to wait for regulators to approve lots of licenses or for the passporting debate to be settled.” Such arrangements will have an inevitable expense impact, but Weil said the scheme would not be “materially additive” to costs.
Escape from Solvency II Not Likely
The IUA and other market bodies are cheerleaders for the negotiated retention of passporting, but the prospect of retention looks increasingly unlikely. An alternative is “equivalence,” an option under which free trade in equivalent services is permitted when EU bureaucrats deem local regulation to be equivalent to EU requirements. The London Market Group, a cooperative body that brings together the IUA, Lloyd’s, and the
London & International Insurance Brokers’ Association, has published recommendations to the U.K. government to guide its Brexit negotiations. It highlights the need for a guarantee that the London market will be considered to have regulatory equivalence with the EU and calls for a new trade deal giving U.K. and EU insurers, reinsurers and brokers continued rights to undertake cross-border activity. In contrast, the worst-case outcome would make that illegal. That is, Britain trades with Europe without a deal and falls back on World Trade Organization rules.
LMG chairman Nicolas Aubert, whose day job is chief executive of Willis Towers Watson Great Britain, says: “Over £8 billion of EU business comes to London, so we are continuing to work closely with the government to see where there are existing precedents in current international agreements which could be used for the Brexit negotiations to support our industry.” LMG also believes Brexit offers an opportunity to review the current regulatory environment. The goal would be to ensure U.K. rules remain proportionate and do not put London at a disadvantage. Obviously, the U.K. currently meets EU regulatory requirements, but one hope of some U.K. insurers and brokerages is that Brexit could lead to a lighter regulatory touch than that of the new EU regime, called Solvency II, which many find overly burdensome.
We don’t have a crystal ball, but we think it is likely that the U.K. will look to retain Solvency II equivalence.
Bronek Masojada, CEO, Hiscox
Their hopes seem unlikely to be realized. Sam Woods, CEO of the Prudential Regulation Authority, the U.K. commercial insurance supervisor, spoke to a U.K. Treasury committee on EU insurance regulation in late February. He hinted little will change after Brexit.
“My view of it is that the fundamental regime is pretty sensible,” Woods told members of Parliament. “It is very largely built on the regime that we had here in the U.K. before, which has basically been exported to the rest of Europe.” He said it seems very unlikely that the U.K.’s regulatory regime will be made significantly less onerous as a result of Brexit.
Masojada of Hiscox agrees. “We don’t have a crystal ball,” Masojada says, “but we think it is likely that the U.K. will look to retain Solvency II equivalence.”
