Introduction
Almost all the articles issued in the past year or so talk of the complexities of Brexit and the difficulties it presents. Few if any appear to identify opportunities and yet they exist. One, which could be significant, is discussed in this paper.
Fragmentation
The UK insurance market is made up of many insurers. Some of these focus on specific products or distribution models and some offer a wider range of products and operate in many jurisdictions. The specialty market, which is based around Fenchurch and Leadenhall Streets and streets running off them with Lloyd’s at the centre, writes a wide variety of risks primarily of a specialist nature using a full gamut of distribution models across many jurisdictions and regions.
One of these is Europe and what Brexit means is that insurers, brokers and MGAs registered in the UK but trading in Europe will not be able to continue to trade across the border between the UK and any EU country. They will need to have separate legal entities in the EU after Brexit takes effect. Many of the companies have already declared where they are going to set up their European operations. From an insurer point of view, this includes the following:
Belgium
- MS Amlin
- Lloyd’s
- QBE
Luxembourg
- AIG
- CNA Hardy
- Hiscox
- Liberty
- M & G
- RSA
- Sompo
- Tokio Marine
Ireland
- Aviva
- Beazley
- Royal London
- Standard Life
- Travelers
- XL Catlin
There are a number of other insurers using a variety of other jurisdictions as the base for their European based insurer including France, Germany, Spain, the Netherlands and Malta. Most of the insurers intend to use their operations in these countries to underwrite and service their EU business, in many cases choosing countries where their operations are already well established and/or they have a well-established relationship with the regulator.
One of the defining elements of the specialty market is that a significant number of the risks are written on a subscription basis. Once there may have been a significant number of subscribers to a risk, however as the market has consolidated this has reduced and the average number of subscribers to a risk is down to something like 10 or less on average.
With all these insurers moving the centre of their EU business to EU countries there has been a fragmentation of the insurers who write subscription European business in London.
Lloyd’s however, has devised a strategy by which it will effectively create an environment in which nothing appears to have changed. Having decided to set an insurance company up in Belgium it proposes to have that company trade in the UK via a branch regulated in the UK. The various Managing Agents at Lloyd’s will be appointed as agents for the new Belgian insurer and will subscribe to the risks for that insurer and the insurer will then reinsure those risks 100% to the Syndicates managed by those Managing Agents.
This represents a significant advantage to Lloyd’s because (outside of the operational and logistical issues of such an undertaking) there will be almost no change for those who distribute the insurance business on their behalf, the Lloyd’s brokers and coverholders or MGAs. To them virtually nothing changes in so far as the business they place or write on behalf of Lloyd’s is concerned. They continue to access that business in the EU in the same way and continue to place it with Lloyd’s in London the same way. Though they may also need to set up a company in the EU, the issues for them are significantly less in terms of capital and other requirements (with the exception of MGAs and coverholders who may face multi-jurisdictional regulation).
On the other hand, if an EU risk being placed by a broker is a subscription risk requiring multiple insurers and they are now in a number of different jurisdictions in the EU there is considerably more work to be undertaken by the broker. Work is underway in order make placing risks electronically a thing of the present and this will certainly assist with logistics and hopefully administration. However, any individual broker working in London will not be able to access an insurer in the EU and vice versa using electronic placing because to do so would be cross-border trading, something which is unlikely to exist post-Brexit (otherwise the insurers would never have moved EU business from London to new EU subsidiaries at such cost in time, effort and tax).
So, brokers in London seeking to place global programmes with an EU element or EU based risks are going to need a broker in the EU to place the EU element of the risk. If they are an international group, that would no doubt be a subsidiary they have set up in the EU for that purpose increasing the frictional costs to them of servicing their clients’ business. If the London broker has not set up an EU subsidiary it will mean utilising the service of an EU based broker who will charge commission, reducing the commission which the London broker may have earned. Either is not ideal for a broker or potentially a client who may find their insurance costs more.
However, there is an alternative which retains the current cost base for London brokers and requires no change in current process. It also raises the opportunity for Lloyd’s to significantly grow the kind of business it has traditionally written – international specialty business requiring a subscription market.
With Lloyd’s devising a post-Brexit model which sees no material change to its operations – that is the risks are brought in to London and underwritten in London by specialist underwriters in London with experience in the type of business being offered – there is a significant opportunity to offer brokers something which the current London Market insurers who are setting up in the various countries around EU can’t. Stability and no change to process or increased cost. If I was a London broker with a book of international specialty business I would be looking at Lloyd’s and thinking there is nothing like the ease, the convenience and relative efficiency it offers. In some respects, there may never have been a single greater opportunity presented to Lloyd’s. Some may argue that the EU business in Lloyd’s is only marginally profitable, Lloyd’s being the market of last resort. However, that is no bar to Lloyd’s seeking to improve the quality of the business that it writes in order to grow and protect its longevity.
To be able to power the growth opportunity, Lloyd’s and its syndicates (including admittedly many of the international insurers moving their EU business offshore) need to plan and prepare and it seems that this is not happening. Managing Agents are required to submit their plans and Lloyd’s will individually assess each and every one of them. Once agreed the capital alignment needs to take place. For the 2019 year that process is already underway.
However, it seems that no steps are being taken to openly encourage the Managing Agents to increase their underwriting limits and capacity in order to be able to write more EU business in response to Brexit. We understand that this may in part be due to the dynamics of last years losses playing their part. This looks like a significant opportunity lost.
There is no doubt that the opportunity exists. Lloyd’s has openly announced that it can achieve the structure it proposes and the regulators, here and in the EU, appear to have agreed to their proposed structure. That being the case we hope that Lloyd’s as a great British institution is doing its’ utmost to protect the London insurance market and its own significant part of it by seizing the opportunity that exists.
We for our part would like to see Lloyd’s strengthen its position in the world of international subscription based and specialty insurance and continue to maintain its position at the centre of a strong, healthy and competitive the London Market.
