London should “be bold” on ILS post-Brexit: Drinker Biddle

by Artemis on June 29, 2016

Following the UK’s decision to leave the EU last week, U.S. domiciled law firm Drinker Biddle & Reath LLP has provided some thoughts on what a post-Brexit world may look like for the London and UK market, citing the possibility that it may not be negative for the plans to facilitate ILS business.

Leaders, executives, analysts and observers within the insurance, reinsurance, and insurance-linked securities (ILS) landscape continue to speculate and discuss the potential challenges and opportunities that could present themselves after the UK’s vote to leave the European Union (EU).

The specialist Lloyd’s of London insurance and reinsurance marketplace and the wider London and UK re/insurance industry, is regarded as a global hub for traditional risk transfer operations, and has ambitions to become an international centre for ILS business, also.

However, the recent Brexit vote from the UK public has sparked uncertainty surrounding London’s position as a leading insurance and reinsurance hub, and its ambitions in insurance-linked securities (ILS), although some in the sector have said that London can continue to flourish both in and out of the EU.

Given Brexit has now been voted for positively by the populace and the preparation for an EU exit is underway, Drinker Biddle suggests that the regulatory environment post-Brexit could actually be more favourable for ILS in some ways.

“Already a centre of excellence and innovation from an underwriting, administrative and operational perspective, now more than ever London and the UK should leverage this expertise to capture a share of the ILS activities that may well grow post-Brexit, consider lowering regulatory and tax hurdles, and develop an express regulatory construct to ensure speed and access to market,” said Michael R. Halsband, counsel in the Insurance, Transactional and Regulatory division at Drinker Biddle.

European-wide Solvency II regulation came into effect at the beginning of 2016, and Halsband feels that this will continue to be a key driver promoting ILS business. And while departure from the EU means the UK might need to secure Solvency II equivalence (although the work has been done, so this shouldn’t be too trying), as seen in Bermuda, Halsband feels the region wouldn’t struggle achieving this, and that the UK should grasp the opportunity and “be bold nevertheless.”

Being bold is perhaps just what the UK and London market needs to do right now, with uncertainty a serious threat to confidence. Progressing a high-profile initiative like the ambition to become an ILS hub, should remain a priority at times like this.

Furthermore, Thomas Dawson, a New York-based partner at the firm, underlined how the global insurance and reinsurance industry will be keeping a keen eye on the developments in the UK, particularly with regards to regulation.

“The industry will also be watching with great interest as commercial innovation in the London market – with respects to traditional products, ILS/capital markets developments, use of blockchain technology etc. – may now proceed without having to conform to EU-wide norms,” said Dawson.

It’s an interesting point, and supports the firm’s belief that the UK has an opportunity to establish favourable regulatory guidelines that could perhaps be more achievable outside the EU, and which could boost the region’s attractiveness as an ILS hub, and global insurance and reinsurance centre.

Artemis has discussed numerous times the ambitions of London to become a global hub for ILS business, as the UK Treasury continues to develop legislation that will enable the facilitation and issuance of ILS business in the region.

At this stage it remains unclear what impact Brexit will have on both the ILS sector as a whole and the desire for London to establish itself as an ILS hub, although in the near-term the impacts are expected to be limited.

Uncertainty remains about when the UK will actually begin its process of leaving the EU, and if companies seek to redomicile outside of the UK as a result, the drain on talent, and so on could start to impact the country’s insurance, reinsurance, and ILS business.

Halsband feels that recent developments in the UK marketplace regarding Brexit and ILS, should not slow this process down and might even provide an opportunity for London to accelerate its ILS plans.

“Indeed, even before Brexit, the ILS sector as an innovator was a significant disrupter. London and the UK should consider accelerating steps to attract investment in ILS, leveraging proprietary content and information.

“Think of the potential implication of a licensed Lloyd’s or London market index to expand investor access to the sector and offer further opportunity in turn for Lloyd’s, the London market and the broader global insurance and reinsurance market to hedge dynamically their exposure with this investor base,” said Halsband.

Technology and ILS have been and will likely continue to be major disruptive forces in the global insurance and reinsurance landscape, and while Brexit has sparked notable uncertainty and presented challenges, Drinker Biddle appears keen to highlight potential opportunities, as well.

Dawson notes that from a U.S. regulatory perspective the Brexit vote has little impact on re/insurers located both in the UK and EU member states, noting that discussions between the U.S. and the UK on the establishment of a bilateral agreement for reinsurance business will continue, and be watched closely by those concerned.

The impacts of Brexit on the UK insurance, reinsurance and ILS marketplace will remain unclear for some time, but it’s clear that Drinker Biddle feel London and Lloyd’s should proceed as planned and may have an opportunity to accelerate and develop even more favourable regulatory frameworks for both ILS business and traditional re/insurance, cementing its place as a global risk transfer hub whether inside, or outside of the EU.

Also read:

Consistent access to reinsurance positive for re/insurers post-Brexit.

Post-Brexit uncertainty for re/insurance, low correlation highlighted.

No immediate Brexit hit to ILS market, but structural issues to consider.

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