Lloyd’s safe from immediate Brexit hit, long-term uncertain: J.P. Morgan

by Artemis on July 20, 2016

Analysts at J.P. Morgan have commented on the impact the Brexit vote might have on Lloyd’s of London insurers and reinsurers, stressing that while the long-term implications remain uncertain, Lloyd’s players don’t appear overly concerned for the near-term.

Like the rest of the financial industry in the UK, insurers and reinsurers at Lloyd’s of London, and the wider London re/insurance industry have been questioning the impacts of Brexit on their operations.

While no immediate impact from the leave vote is expected, or at least until an Article 50 notice has come into effect and the UK’s choice to exit the EU actually starts to come to fruition, the UK re/insurance sector is largely in unprecedented lands, and no one seems overly confident on what the future might hold.

In discussions with Lloyd’s insurers, analysts at J.P. Morgan note that the most immediate question concerned passporting rights and what would happen to cross-border risk that is underwritten utilising EU passporting arrangements.

According to J.P. Morgan this translates to just 4% of Lloyd’s market gross written premiums (GWP), and with Lloyd’s proven ability in establishing hubs throughout the world, should passporting rights be lost J.P. Morgan feel the marketplace wouldn’t struggle to create new arrangements with remaining EU member states.

Importantly, passporting issues don’t apply for reinsurance business due to cross-border transactions currently being allowed from countries outside of the EU. This is under equivalence frameworks that the firm believes the UK regulatory environment will meet with ease should it be required in the coming months, explains J.P. Morgan.

The impact passporting rights may have on primary Lloyd’s business will remain uncertain until discussions between the UK, the EU and individual member countries has taken place, but in the near-term it’s expected that things will stay pretty much as they are.

J.P. Morgan highlights that the top immediate risk post-Brexit is with currency and financial market exposure of the central fund, with the majority of its assets being held in USD.

“They noted that fixed-income markets have actually seen gains since the Brexit vote due to the reduction in rates and currently see no reason to readjust the asset allocation of the central fund. For the listed companies we cover, we expect investment income in the first half to be relatively strong in light of the market moves we have seen – the trade-off is that reinvestment rates are again lower,” explained J.P. Morgan.

Lloyd’s and the London marketplace has stressed its desire to remain a global hub for re/insurance and become an international centre for insurance-linked securities (ILS) business, whether a part of the EU or not, so it’s likely that Lloyd’s would be keen to begin setting the changes in motion for life after Brexit.

“There are bigger questions about the attractiveness of London as a global hub for insurance, however at this stage, it is difficult to assess how great any potential loss of businesses or people is likely to be.

“It was noted that the Lloyd’s Market itself would probably not be set up in the structure it is today it were to be relaunched tomorrow, and that in practice over its long history, no other geography has been able to replicate its setup or success,” said J.P. Morgan.

The specialist Lloyd’s market continues to evolve and as London looks set to leave the EU with the rest of the UK the re/insurance sector will have to fight and adapt to remain relevant and profitable.

Lloyd’s Chairman John Nelson has expressed previously that it has a contingency plan and is prepared for Brexit, and from J.P. Morgan’s note it seems Lloyd’s insurers aren’t panicking about any immediate impacts, but are aware of potential regulatory issues further down the line.

Exactly what the regulatory environment might look like in the coming years is impossible to say, but all parties that benefit from the broad scope of the Lloyd’s marketplace will surely be keen to ensure any cross-border activity can continue, and limit any potential fall-out from Brexit.

Also read:

Longevity risk transfer more attractive in wake of Brexit vote: Hymans.

London ILS fund managers see domicile options post-Brexit: Cadwalader.

Reinsurers best positioned post Brexit: Deutsche Bank.

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

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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