The UK insurance and reinsurance market is awash with uncertainty, as the ramifications of a UK vote to leave the European Union are digested and London seeks to understand what a vote for Brexit will mean for its future prospects.
Industry leaders have come forward to insist that London, and the Lloyd’s insurance and reinsurance market in particular, will not face any major upheaval or change to their access to underwriting European risks.
The passporting (or structural) issue is being downplayed by many, as it is now so easy to establish operations in another domicile which has agreements in place for accessing EU business. Of course that does raise the spectre of jobs shifting to other countries, but business leaders continue to focus on London remaining a hub.
Investment risk is another issue that is being discussed, although many are overlooking the bond exposure of some of the world’s biggest reinsurance companies and what further declines in yields will do for their prospects.
But in all the scrabbling to understand the fall-out from the Brexit vote, one issue that has been overlooked is the ability of UK life, non-life and general insurers to continue to access global sources of reinsurance capital.
Continuity and consistent access to reinsurance capital is vital in today’s risk transfer markets, where portfolio shaping, retention strategies, and ultimately the flow of profits are often controlled with the help of reinsurance arrangements.
The abundant availability of both traditional and alternative reinsurance capital is a major positive for the UK and London insurance and reinsurance market in the wake of the Brexit vote. In a time of uncertainty, the robust availability of risk transfer capacity, from the European major reinsurers, the Bermuda catastrophe and specialty reinsurance experts and, of course, the growing pool of insurance-linked securities (ILS) fund manager capacity, can all help to ensure continuity and consistency of capacity availability.
Ultimately this consistent availability of deep pools of reinsurance capital is a positive for insurance consumers, both in the UK, the rest of Europe in this time of uncertainty, and around the world, as the Brexit fall-out spreads its tentacles far and wide.
Importantly, the major European reinsurers Munich Re, Swiss Re, Hannover Re and SCOR, are all major players in the UK and London market, providing reinsurance and retrocession capacity to UK domiciled companies.
Additionally these companies also provide insurance risk transfer directly to large UK corporations, such as utilities, gas, energy, construction and other sectors, in an increasing trend which sees some of the world’s largest reinsurance providers offering tailored solutions for large corporations.
As the UK ponders its strategy for breaking away from the EU, a strategy that at the moment seems completely disjointed we must say and uncertain as to exactly when or how it will happen and to what extent the country will distance itself, it is expected that there will be continuity of reinsurance capital in both directions, into and out of the UK.
Analysts at Peel Hunt stressed this morning; “Access to European reinsurance capital relief and peak risk protection will be maintained, sustaining capital structures,” for UK and London market re/insurance players.
Additionally, Peel Hunt said; “The Lloyd’s Market will remain a go-to-hub for global specialty insurance underwriting capacity with most of the market’s exposure being to the US (50%) and the UK, with Europe only 14% of premiums.”
Lloyd’s of London CEO Inga Beale also explained the importance of the London market’s specialty insurance expertise, in an FT article this morning, explaining that she expects London and Lloyd’s to maintain their leading position in global risk transfer even after the Brexit has been implemented.
The Reinsurance Association of America stated the other day that one of the key considerations, as Brexit is being implemented, is to ensure the free flow of reinsurance capital across the Atlantic and also between London and Europe continues.
Consistent access to reinsurance capital is now seen as vital, for all global re/insurance market hubs. Maintaining this access is therefore a key requisite for business as usual to continue, and hence the focus on “business as usual” in industry statements.
With the convergence of reinsurance markets and capital markets resulting in reinsurance emerging as an alternative asset class, the availability of reinsurance capital seems assured nowadays. The next step is to ensure continuity of access, resulting in consistent availability of risk transfer capacity, something else that the ILS evolution has assisted with, as reinsurance capital increasingly is less bound by borders and regulatory locations.
In the future it is to be hoped that regulatory borders can be broken down with the help of efficient capital and insurance technology (insurtech).
When the world moves towards electronic pricing, transfer, trading and settlement of insurance or reinsurance risk transfer, the imposition of regulation based on geographic location will increasingly seem like an old-fashioned hurdle that needs to be adjusted to fit the modern market paradigm.
At that point, access to reinsurance or risk capital will truly be consistent and issues such as a Brexit vote will not have any impact to the ability of capacity to flow and connect to risk. The ILS market has begun a mission to more directly connect capital to insurance risks, a mission that insurtech will now take to the next stage.
When macro events, such as the Brexit vote, occur one thing becomes increasingly clear. The idea that a physical location remains the centre of a market is a concept running on borrowed time, in these days of efficient capital and technology.
The ILS and reinsurance market are both moving rapidly towards a location agnostic operating paradigm, that should be positive for the market, its players and ultimately for the locations, or hubs that have deep expertise in capital and technology, along with the vision or foresight to make regulation work for them (rather than against).