The British exit (Brexit) from the European Market, approved by the majority of voters in a June 23 referendum, has significant implications for the Lloyd’s insurance market. The immediate aftermath of the vote is market volatility, along with many unanswered questions about how Britain’s departure will take place and what the impact will be on the international insurance industry.
Lloyd’s Chief Risk Officer Sean McGovern gave a February 10 speech to the Insurance Institute of London about the potential impact on the London insurance market of the United Kingdom voting to leaving the European Union.
Mr. McGovern’s presentation was made in the Old Library to a group of leading insurance and risk management executives working in the City of London.
Here are some of the highlights of his presentation:
- Lloyd’s predicts a period of considerable uncertainty, not surprisingly. Technically, the UK needs to invoke Article 50 of the Lisbon Treaty. This provision notifies the EU of a member’s intent to leave, and is followed by a 24-month transition period which might be extended. Wording of Article 50 is somewhat vague, however, and there is not a strict timing requirement as to when the notification must be triggered. Some industry experts are suggesting that the UK should undertake much work before submitting its notification, in order to maximize the 2-year transition.
- Lloyd’s intends to work with the UK Government and EU Institutions during any negotiations to retain market access for Lloyd’s and the London Market and create as much regulatory certainty as possible.
- Lloyd’s has examined alternatives to the UK’s existing relationship with the EU, but admits to real uncertainty about what those alternatives might be, as well as what will be politically and practically achievable after the exit vote. Lloyd’s has determined that none of the alternatives will be as beneficial for the London market as the current relationship.
- Lloyd’s is taking steps to secure the necessary access to EU member states. However, Lloyd’s has determined that the London market’s access to the EU will not be as good as it has enjoyed in the past.
- Brexit does not offer a “route to insurance regulatory nirvana,” according to Lloyd’s. If UK financial stability is unduly stressed, the Bank of England may become more conservative and require more capital than EU Directives.
On a related note, the European Commission on June 5, 2015 adopted its first “third country equivalence” decisions under Solvency II, the EU’s new prudential regulatory regime which sets out rules to develop a single market for the insurance sector. After receiving equivalence, EU insurers can use local rules to report on their operations in third countries, while third country insurers are able to operate in the EU without complying with all EU rules.
These equivalence decisions are intended for countries such as Switzerland, Australia, Bermuda, Brazil, Canada, Mexico and the USA. They will provide more legal certainty for EU insurers operating in a third country as well as for third country insurance companies operating in the EU. The Brexit vote calls into question how this will relate to the UK.
It should be noted that the EU has 28 member states including the UK (19 of which share a single currency) and a population of more than 500 million. Since its launch in 1975, the European Union has evolved from a trade-focused arrangement to a full political union with significant regulatory authority residing in Brussels.
Background on the Lloyd’s Insurance Market
The Lloyd’s Building at One Lime Street in the heart of the City of London has been the global headquarters for Lloyd’s since 1986. Underwriters for the managing agents working from the Lloyd’s building include many well-known carriers in the insurance industry, including AmTrust, Ark, Chubb, Markel, Liberty, QBE, and XL Catlin.
The Corporation of Lloyd’s, which oversees and supports the Lloyd’s market, employed 995 staff as of the December 31, 2015.
According to the Lloyd’s website, key participants in its market include the following:
- 219 brokers who distribute the business
- 94 syndicates that write the insurance
- 3,872 coverholders and service companies that offer local access to Lloyd’s
- Managing agents to manage the syndicates
- Corporation of Lloyd’s to support the market
- Policyholders who transfer risk
The U.S. Lloyd’s market is distributed to 35% property and casualty, 24% reinsurance, and 21% casualty.
U.S. insurance defense law firms that are active on a Lloyd’s panel will want to stay in close contact with their clients and referral sources, while recognizing that there will be much uncertainty ahead for at least the next two years.
Law firms that might have a heavy reliance on the Lloyd’s insurance market may want to start hedging their own bets with an increased level of business development activity.
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