Dave Matcham, chief executive of the International Underwriting Association, explains how London Market companies are preparing for Brexit while lobbying hard for greater contract continuity.
It was Benjamin Franklin who wisely counselled that: "By failing to prepare, you are preparing to fail." This is a maxim that London Market insurers seem to have had firmly in mind ever since the UK's 2016 referendum on EU membership resulted in a vote to leave.
As the 29 March deadline for Brexit draws ever closer there has been much debate about the government's preparedness for a so-called 'no deal' scenario where the UK's relationship with the EU is conducted under World Trade Organisation (WTO) rules. Yet for IUA members, and other parts of the London Market, this is the outcome upon which all contingency plans are based.
Companies have instigated a variety of different actions in order to ensure they are able to continue serving their clients without interruption after March 29, come what may. A popular model has been to establish a new business entity somewhere within the remaining 27 EU member states with rights to accept new policies across the trading bloc.
Expertise remains in London
No single insurance hub has emerged as a favoured location for such operations with firms opting for centres where they already have an existing presence or strong customer base. Luxembourg and Dublin have both been popular choices, but for many companies the underwriting expertise underpinning these new entities will remain in London.
For companies operating in London as branches of parent companies or subsidiaries within the EU 27 preparations have been relatively straightforward, thanks to the Bank of England's announcement of a Temporary Permissions Regime. It allows firms to continue operating as normal post-Brexit whilst they undergo the process of seeking a new regulatory authorisation.
Airmic - FERMA Brexit Newsletter - January edition
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Lobbying for contract continuity
Unfortunately, the EU has failed to reciprocate this move. Companies servicing European contracts in London have, therefore, been transferring these policies to operations in the EU 27, so that they can continue to serve clients without any legal question about their authorisation to do so.
This is not a quick or easy process and so the industry has been lobbying hard to ensure European regulators understand issues of contract continuity and can support firms as they transition to the new political and business environment. Recently, there have been signs that this message is at last getting through with supervisors in Germany and France announcing plans to manage contract continuity as efficiently as possible.
We are still hopeful also that the European Insurance and Occupational Pensions Authority (EIOPA) will eventually issue central guidance so that regulators across the continent can approach this issue in a harmonised manner.
The need for insurers to push ahead with preparations for a WTO Brexit scenario has been reinforced by the relatively little attention paid to financial services in the Withdrawal Agreement and Political Declaration. The advantage of the Withdrawal Agreement for our industry is the existence of a transition period, which would allow companies more time to comfortably complete any necessary business transfers.
The Political Declaration, which sets out the framework for the future relationship between the EU and UK, contains just three paragraphs on financial services and proposes a reliance on existing equivalence rules.
These alone would be quite inadequate for facilitating efficient cross-border trade in insurance services and we are keen to see the negotiations build upon and extend a number of concepts within the EU equivalence system to create a new economic and regulatory arrangement. There are several precedents for these proposals, which would preserve the ability of EU clients to access the London Market for complex risk coverage.
Whilst a final deal on the future trading terms between the UK and EU still seems some way off, there is some welcome certainty on how London Market firms will interact with other key international markets post-Brexit. Already a UK-US covered agreement for has been signed that will benefit clients by reducing burdens on insurers and reinsurers while maintaining prudential standards. A UK-Swiss bilateral trade agreement has also been announced to support future commercial relations.
Many Brexit questions are still to be resolved, of course, but the insurance industry exists to help manage uncertain future events and is, I believe, better prepared than most for the changes to come.