The fallout from the UK’s vote to leave the European Union, or Brexit as it’s more commonly known, could result in lost business for the London insurance and reinsurance market, unless the UK government can negotiate continuity of passporting rights.
Brexit was always going to hit the insurance and reinsurance sector in London, with Lloyd’s of London, London market re/insurers and even some ILS fund managers potentially exposed to business difficulties if the ability to easily passport into the EU was lost, or hindered.
Fitch Ratings warns this morning that “Brexit could lead to a loss of business for Lloyd’s of London unless the UK government is able to negotiate passporting arrangements to maintain access to the European Economic Area (EEA).”
Without those passporting rights, UK and London based insurance or reinsurance players wanting to underwrite risks from the EEA would have to set up entities within the EEA to achieve that.
Fitch said it believes that this could lead to business moving away from the Lloyd’s platform, which would hurt London as a financial and re/insurance hub. The EEA accounted for £2.9bn or 11% of Lloyd’s gross written premium in 2015, according to Fitch.
Any loss of passporting rights could make Lloyd’s less attractive to the insurance-linked securities (ILS) community, as a number of ILS funds already have operations there. It could also make Lloyd’s less attractive to third-party capital investors, which could lessen the market’s ability to leverage lower-cost capital which right now is perhaps key to its future.
Brexit has already been blamed as a reason that the project to develop a Lloyd’s market index, for risk transfer use, has been shelved. If Lloyd’s wants to attract ILS funds, capital and ultimately transactional business in greater volumes, maintaining access to passport rights could prove key. Institutional investors are a fickle bunch and prone to moving where doing business is simplest and low-friction.
While a solution is likely to be found, it is the time that could take and the uncertainty associated with it that could ultimately hurt the London insurance and reinsurance market. In the softened and competitive re/insurance marketplace, any lost business could be very hard for London to win back.
With the 2016 Monte Carlo Reinsurance Rendez-vous fast approaching, Brexit is certain to be a hot topic at the key European reinsurance meetings.
– Lloyd’s puts Index on hold, as Brexit takes priority.
– Lloyd’s safe from immediate Brexit hit, long-term uncertain: J.P. Morgan.
– 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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