What impact might Brexit have on the London insurance market?

Posted in Financial institutions

The London market is currently the largest global centre for insuring commercial and specialty risk. A substantial amount of insurance and reinsurance is distributed and underwritten both into and out of the UK. The London market currently has access to 500 million customers through the EU (estimated to represent £6bn in premium income). This level of market access may change depending on how the UK continues to engage with the EU after Brexit.

As a member of the EU the UK currently benefits from the European single market, using passports available in financial services and other areas to take advantage of free movement principles in the Treaties. Accordingly, once authorised in one EU Member State an insurer or broker can provide services or establish a branch in another Member State without the need to seek a separate licence. Once the UK leaves the EU these Treaty rights will cease to apply.

Subject to the outcome of any negotiations, the UK might adopt a number of models to determine its relationship with the EU and other insurance markets. The least disruptive model would be for the UK to become part of the European Economic Area (EEA) much like Norway, Iceland or Liechtenstein (although UK Prime Minister Theresa May has hinted that her preference is for a bespoke arrangement rather than a pre-existing model). Under this model Solvency II and the Insurance Distribution Directive and other EU legislation would still apply in the UK and would enable firms to benefit from the European passport. Politically, however, the continued free movement of people and lack of voting rights on legislation might mean that membership of the EEA will be hard to achieve.

Switzerland is not in the EEA but has signed a number of bilateral agreements with the EU including the 1989 agreement allowing Swiss non-life insurers access to the EU market (and vice versa). If the UK wished to operate on this model, individual bilateral agreements would have to be signed to cover each market or area of collaboration, including insurance.

The Prudential Regulation Authority (PRA) has been heavily involved in the negotiation of Solvency II which was based on the UK’s own ‘risk-based’ regime. At least for the foreseeable future therefore, the approach to the regulation of UK insurers is unlikely to change. Unless EEA status is achieved however, the UK must seek recognition of equivalence under Solvency II in order to continue to operate in European markets on anything like a level playing field.

If the UK does not negotiate to maintain access to European markets through membership of the EEA and has not secured a Swiss model bilateral agreement for the insurance sector, UK insurers may still be able to cover European insurance risks. They could do so by establishing branches, seeking local authorisation, in European countries in which they wish to operate. They would not have the benefit of the passport but could still trade in EU countries to the extent that they met the local reserving, capital and conduct requirements. Furthermore, there is currently no consistent law governing where insurance is underwritten in the EU. Accordingly, London market insurers might insure European risks where local law does not trigger the need for a local licence (known as non-admitted business). The General Agreement on Trading Services which is annexed to the World Trade Organization rules contemplates marine, aviation and transport being written in this fashion, which Article 172 of Solvency II is being interpreted to mean that reinsurance may be written on a non-admitted basis provided the UK attains equivalence.

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