London market responses are pouring in after the shocking result of June 23’s UK referendum to leave the European Union.
Those voting for Brexit won the day, polling 52%, versus 48% for the “Remain” camp voting to stay, in a 72% national turnout.
The UK has at least two years to come up with agreements on how to respond to issues such as creating trade deals with Europe to access its single market and so-called "passporting" for UK-based re/insurance firms.
A selection of responses from London re/insurance sector stakeholders are listed below.
Lloyd’s of London chairman, John Nelson, said:
“I am confident that Lloyd’s will stay at the centre of the global specialist insurance and reinsurance sector, and I look forward to continuing our valuable relationship with our European partners.
“For the next two years our business is unchanged. Lloyd’s has a well prepared contingency plan in place and Lloyd’s will be fully equipped to operate in the new environment.”
UK insurer Aviva issued the following press release:
“Aviva has conducted extensive analysis of the possible implications of a vote to leave the EU and considers it will have no significant operational impact on the company.
“Aviva’s operations in the UK and its other subsidiaries in the EU are well capitalised and continue to trade as normal. Aviva continues to be supervised by the PRA/FCA as lead regulator and Aviva’s European subsidiaries are incorporated and regulated locally and principally trade in their local market.
“At Aviva’s 2015 preliminary results, published in March 2016, Aviva reported a Solvency II ratio of 180% and a surplus of £9.7 billion. Aviva has one of the strongest and most resilient balance sheets in the UK insurance sector with low sensitivity to market stress and over the last four years Aviva has tripled its economic capital surplus.
“Aviva will continue to monitor the technical implications of the vote to leave, which will only be resolved after several years of negotiating a new relationship between the UK and the EU.”
City watchdog the Financial Conduct Authority (FCA) issued a statement:
“This has significant implications for the UK. The FCA is in very close contact with the firms we supervise as well as the Treasury, the Bank of England and other UK authorities, and we are monitoring developments in the financial markets.
“Much financial regulation currently applicable in the UK derives from EU legislation. This regulation will remain applicable until any changes are made, which will be a matter for Government and Parliament.
“Firms must continue to abide by their obligations under UK law, including those derived from EU law and continue with implementation plans for legislation that is still to come into effect.
“Consumers’ rights and protections, including any derived from EU legislation, are unaffected by the result of the referendum and will remain unchanged unless and until the Government changes the applicable legislation.
“The longer term impacts of the decision to leave the EU on the overall regulatory framework for the UK will depend, in part, on the relationship that the UK seeks with the EU in the future. We will work closely with the Government as it confirms the arrangements for the UK’s future relationship with the EU.
International Underwriting Association (IUA) chief executive, Dave Matcham, said:
“Clearly the UK’s decision to exit the EU presents challenges for London Market companies and uncertainty surrounding the potentially prolonged nature of this process will be problematic for future planning. Our industry is, however, experienced in responding to change.
“The free trade benefits of EU membership have been vital in maintaining London’s position as a global insurance hub and are highly valued by IUA members. This is true both for insurers headquartered in the UK and those international firms that use London as their centre for European business.
“We know that many companies will now be considering their own individual responses. Continued access to European markets is essential and will, I expect, be at the forefront of the process to respond to the referendum decision. The IUA will be working with the London Market Group to ensure our industry’s views are fully represented as developments continue.”
“The IUA’s own research shows that more than 20% of our members’ premium income comes from continental European markets. Insurance is almost by definition an international business and in order for it to operate efficiently regulatory developments are pursued at an international level.
“Outside the EU it will still be desirable for UK supervisors to have reciprocal arrangements in place with other national regulators. Otherwise we will see a duplication of compliance costs that will damage companies and escalate costs for clients.”
Legal firm Clyde & Co’s global corporate insurance head, Andrew Holderness, commented:
“Insurers, reinsurers or intermediaries urgently need to review the scale of their operations from continental Europe into the UK, or vice versa, and determine what impact losing it might have on their overall balance sheet. If it’s critical, or if they want to continue writing it, they have a number of options; acquiring another business to provide the right platform, establishing a branch or subsidiary – or finding another business to front for them. If operations are marginal, there may well be value to be had from the sale of the renewal rights or a portfolio transfer.
“A key question facing many insurance businesses is whether or not any of their staff are utilising the free movement of citizens regime. An audit to identify which members of staff are affected is a critical first step, followed by discussions to determine how they can remain in their posts following the vote. Alongside the greater administrative burden, there may well be increased employment costs. It is important to align this work very closely with decisions on possible structures, so that any changes to the organisation designed to secure ongoing access to markets take into account how that might affect the location of senior management and other staff.
“Without passporting, the level of regulation will undoubtedly rise. It is also very likely that the overall demands on the regulators themselves will increase significantly. This will then have knock on effect and could impact their speed of response to a range of issues such as requests for approvals and rule waivers or modifications.”
Credit rating agency Moody’s issued the following in a press release:
“The UK's decision to leave the European Union will lead to a prolonged period of uncertainty that will weigh on the country's economic and financial performance and will be credit negative for the UK sovereign and other rated entities, Moody's Investors Service said in a report published today.
“The immediate financial market reaction has been pronounced, with sterling depreciating sharply and global equity markets falling. Heightened uncertainty during negotiations over new arrangements between the UK and the EU will likely dent investment inflows and consumer and business confidence in the UK, weighing on its growth prospects.
“While Moody's does not expect "Brexit" to have major credit implications for most EU-based issuers, the outcome of the nationwide June 23 referendum could increase the risk of political fragmentation within the EU if popular support for the bloc fades among member states.
“The lasting credit impact of the vote to leave will depend on the nature of the UK's new ties with the EU. Moody's central assumption is that the two sides will eventually come to an agreement that preserves most, but not all, of their current trading arrangements. However, the finer details in areas such as access to the single market, regulation and immigration will have a significant bearing on the new operating conditions for debt issuers.
“The potential credit risks stemming from "Brexit" extend beyond the UK sovereign. In the non-financial corporate sector, car-makers, manufacturers and food producers could be affected by potentially higher trade barriers and reduced volumes. Telecommunication companies, airlines and the pharmaceutical sector are subject to regulatory risk.”
Lobby group Insurance Europe’s president, Sergio Balbinot, said:
“We are deeply saddened to hear that the people of the United Kingdom have voted to leave the European Union. We now hope that policymakers can work quickly to limit the impact that this time of uncertainty will have on both consumers and businesses.”
Consultant PwC’s UK insurance leader, Jonathan Howe, commented:
“To answer the first question insurance companies will be asking - Solvency II will almost certainly remain - too much time, money and effort has been invested and the regulation is enshrined in UK Law. Additionally, the insurance industry should not expect significant dissolution of ‘cumbersome’ EU regulation, given the perception that the UK has a history of ‘gold plating’ insurance regulation.
“The Lloyd’s & London market and general insurance market make extensive use of passporting. The loss of these rights could see insurers being forced to restructure and facing large operational, regulatory and tax costs as they adapt to such a change.
“Many non UK insurance companies from areas such as the US and Asia currently use the UK as their European headquarters and as a ‘gateway’ into Europe through EU/EEA passporting. There is a real risk that these rights could be eliminated and insurers will be thinking about the best location for their bases in the future.”
Axa Investment Managers’ senior economist David Page commented on the economic outlook and market reaction:
“The UK economic outlook is likely to be severely affected by the decision to leave the EU. The economy looks to have sagged under the uncertainty of the referendum itself, with deferral of activity. The decision to leave the EU looks likely to make much of this deferral permanent. We expect subdued investment and foreign direct investment into the UK to weigh on activity. This is likely to be supplemented by the sharp tightening in financial conditions in its wake. Moreover, an expected relative boost to the short term inflation outlook, against rising uncertainty for employment is likely to renew pressure on households. We expect UK GDP growth to slow significantly from the 1.9% we forecast in a Remain scenario. Our expectation is for quarterly growth to fall back towards zero around the middle of next year. Accordingly, we change our forecast pencilling in GDP growth of 1.5% (from 1.8%) in the UK for 2016 and 0.4% in 2017 (from 1.9%).
Legal firm CMS’s insurance sector leader Stephen Netherway, said:
“Seismic, just seismic for the global insurance market based here. The playbook for distribution and route to European market has just been ripped up and we enter the world of Rumsfeld's unknown unknowns. For non-EU domiciled insurers and brokers based here, first up for review must be redomicilisation to preserve the certainty of single market access. For others, can London remain a fulcrum for HQ operations, and if not there will be shrinkage? And spare a thought for those insurers domiciled in Gibraltar, many with strong UK links and workers. This is their Brexit too and they face the spectre of the flight of their passporting rights.”
Insurance equities analyst Eamonn Flanagan of Shore Capital, said of London’s non-life insurers:
“The balance sheets should be resilient given the conservative nature of the portfolios, but for some the increased holdings in corporate bonds could be hit by any widening of credit spreads. However, in the run-up to the vote, the Lloyd's market did not hide its concerns over a possible Brexit given the use of the London Market as a 'passport' into the rest of Europe by many companies and clients.
“Hence, the sector should not be overlooked, with the Brexit vote likely to reduce the attractiveness of the Lloyd's vehicles in terms of potential corporate activity, at least in the short term. The motor insurers are likely to be a safer haven.”
Nicolas Aubert, chairman of the London Market Group and head of Great Britain for broker Willis Towers Watson, commented:
“Today’s result is a significant one, but for the London Market it is very much business as usual for now. As the future of the UK’s trading relations unfolds, we are confident that the market will respond to this complex, challenging and unprecedented situation with the flexibility, agility and pragmatism which is an inherent part of its DNA.
“The London Market enjoys a range of benefits from being part of international markets, and we would like to see as many of these benefits retained as possible as part of the exit negotiations. We will actively follow the progress of the UK’s negotiations with the EU and, in conjunction with market associations & Lloyd’s, participate in the debate with the Government and any other relevant bodies.”
Ian D’Castro, a partner at EC3 Legal, said:
“Although the uncertainties surrounding the real effect of Brexit on the UK economy are likely to persist for sometime into the future, it will have no bearing on EC3\Legal which will continue to offer excellent service to its clients and provide legal advice at a price that they can afford.”
Bermuda’s Business Development Agency (BDA) released the following statement:
“In a global economy, Bermuda is affected, like other nations, by such major events. We stand ready to deal with myriad eventualities. No matter how the exit unfolds, we remind our business partners in the UK that Bermuda continues to offer the same stable, attractive, effective and proven blue-chip international business domicile as it has for the past 70-plus years.
“Today, in fact, Bermuda is better placed than ever to cater to the contemporary needs of international business. Attributes such as our stand-alone Solvency II equivalence with the EU and our progressive path towards Alternative Investment Fund Managers Directive (AIFMD) passport rights in Europe may now appear even more attractive than they were a day ago. These are examples of regulatory votes of confidence given to Bermuda as a robust jurisdiction in its own right, and not contingent on our relationship with Britain.
“Our island enjoys a strong relationship with Brussels nurtured over decades of collaborative efforts by our government, industry and regulator.”
For a US-UK legal perspective, Tom Dawson, a partner and co-head of law firm Drinker Biddle’s insurance team, commented:
“From a US insurance regulatory perspective, the June 23rd Brexit vote has little immediate impact for re/insurers domiciled in both the UK and in EU member states. Insurers already listed by US regulatory bodies to write insurance on a surplus lines basis are unaffected by the Brexit vote. The ability to write reinsurance in the US market has always been open to reinsurers worldwide - subject to collateral requirements. Relaxation of those collateral requirements—the still-evolving “certified reinsurer” status—is open to reinsurers domiciled in approved jurisdictions (the UK, France, Germany, Ireland and Switzerland among them) —and so is unaffected by the Brexit vote.
“The future impact of the Brexit vote remains to be seen of but many in the industry will be monitoring progress of ongoing US-EU “covered agreement” negotiations with the expectation that the UK Government will seek to begin bilateral “covered agreement” US-UK talks, either standalone or as part of a wider trade agreement. Industry will also be watching with great interest as commercial innovation in the London market – with respect to traditional products, ILS/capital markets developments, use of blockchain technology, etc – may now proceed without having to conform to EU-wide norms.”
Ashley Prebble, a partner at legal firm Clifford Chance, commented:
“With many insurers heavily reliant on the EU passport regime and several global insurers choosing to locate their European head office within the UK, there are likely to be serious economic and regulatory consequences for the insurance industry – particularly if the UK does not secure access to the single market as part of its negotiations. There are also potential consequences for EU insurers passporting into the UK and questions over how they access the UK market post Brexit.
“Now, we encourage insurers to consider the potential consequences of Brexit by reviewing their structure, business mix and key contractual arrangements. This may lead to contingency planning to ensure that they have the structures in place to access relevant markets following Brexit.”