The London Market Group (LMG) welcomes the opportunity to contribute towards this inquiry and would welcome the opportunity to set out our thoughts in additional detail by providing oral testimony to the Committee.
The London Insurance Market leads the world in providing specialty commercial insurance, with $110bn of Gross Written Premium in 2018 held in the Market on behalf of customers across the world, making it one of the UK’s major export industries. This international business and foreign investment come to the UK because we have a unique market which pools risk and capital and is not replicated anywhere else in the world. The key strength of the London Market is its ability to provide clients with global policies to cover all of these risks.
The success of the market is key to maintaining the UK’s competitive position and will play a significant role in growing our exports and delivering increased levels of foreign inward investment as major financial organisations seek to participate in the London Market.
In May, the London Market published its third London Matters report, a regular piece of analysis undertaken by the London Market Group to assess the health of the market and its global position. It’s latest findings include:
The points below summarise our position:
We welcome and support a number of elements of HM Treasury’s Future Regulatory Framework (FRF) Review consultation and have also recommended a number of further reforms to the Committee, that we believe would ensure that the London Market remains competitive within the global marketplace and fully contributes to the UK’s economic prosperity in the future. We believe these will be of interest to the Committee:
Response to the Consultation questions
Commercial insurance and the London Market will play a leading role in the UK’s future trade success. The strength of the UK commercial insurance market is that it is truly international. Its success is driven by international trade and encouraging foreign direct investment.
Without commercial insurance, international trade and commerce becomes impossible: planes cannot take off, ships cannot leave harbour and major infrastructure does not get built.
The industry is one of the UK’s most successful export industries:
Business comes to the UK commercial market from all over the world seeking coverage for risks which are too large and/or complex for their domestic markets. It comes to the UK because we have the skills and expertise to underwrite that business and an industry with scale and diversity. The risks are mostly overseas but the activity and the capital required to (re)insurer them are in the UK.
Insurance has significant economic benefits for the UK’s international trading partners:
The London Market can play a critical role in supporting the economic development of countries across the world, growing trade in existing markets and opening new ones and the growth potential is significant:
The London Market has a strong base from which to build but we must maintain the UK’s competitive position, as other international insurance hubs continue to grow.
The London Market Group’s research has highlighted that the London Market is in danger of falling behind other growing international insurance markets such as Switzerland, Singapore, Hong Kong and Bermuda.
These markets are seeking to make their regulatory environments as attractive as possible and in some cases actively benchmarking their regulatory regimes against other locations, in the hope of pulling investment away from the UK. Their insurance markets are seeing significant growth – Singapore has an annual growth rate of 4%, Switzerland 1.7%, Hong Kong 10.2%.
While the UK’s share of mature insurance and reinsurance markets remains stable, more work is needed to gain access to high growth emerging markets.
Given this worrying trend of loss of global market share by the London Market it is particularly important that both Government and industry consider what measures can be introduced to reverse this trend, ensure regulation is proportionate, encourage more trading opportunities and crucially promote this UK industry.
There is currently a gap in the FSMA model. It does not allow for Ministers, parliament, and the industry to have a significant enough say in how the regulators operate. Nor does it allow for any early input into regulatory changes and policy decision making, and it contains no mechanisms for censuring the regulators if they fail to follow the policy objectives that have been set for them.
This is not just a case of reforming the formal regulatory rulemaking process, but also a question of considering the regulators’ supervisory behaviour, which can have just as detrimental an impact on the industry and the attractiveness and competitiveness of the UK market for investors.
For example, the significant number of ‘CEO letters’ – as well as ‘CRO’ and ‘Chief Actuary’ letters, of which there have been four active letters in the last 12 months requiring operational changes from the market – together with policy statements, thematic reviews, ad hoc data requests and even speeches made by senior officials of the regulators. All of this has created a significant body of regulatory requirements and expectations essentially leading to regulatory modifications outside of the more formal rule book. These expectations have layered new requirements on the industry without appropriate and independent checks and balances, creating a significant burden for firms.
This policy formulation necessarily creates a response requirement within the regulated community, requiring firms to respond as if they are regulatory rule changes, as these communications often reference regulatory action or consequences. There is no prior scrutiny of these communications, they are often published without prior notice and there is no recourse to challenge these measures. This does not create the right degree of transparency or accountability.
We also believe that the development of a UK specific framework also offers the opportunity to undertake a consolidation of the different sources of regulation, which are located in different places and require significant institutional knowledge to navigate. Currently regulations affecting the London Market can be found in multiple sources including the FSMA legislation, various statutory instruments, the onshored EU legislation, the regulatory rulebooks of the FCA and PRA and supervisory statements.
Consolidating this and placing all the information, categorised by market sector, and accessed via a ‘one stop shop’ section of the regulators’ websites, would not only be a straightforward way of reducing burdens on firms seeking to find, understand and comply with all the necessary regulation but also make it easier for overseas firms seeking to do business within the UK.
Solvency II Review
Solvency II has brought significant benefits and strengths to the London Market – particularly Pillar II risk management - such as a strong balance sheet; networks of international licences that facilitate access to markets and the ability to write global programmes; and an internationally well-regarded system of regulation that encourages transparency.
We therefore do not support wholesale changes to the regime but would like to see certain refinements to the UK regime and for some of the unnecessary requirements, specifically regarding processes on calculation and validation of capital requirements; reporting requirements; and treatment of branches of overseas firms - to be scaled back to what is actually important to clients, supervisors and firms.
The PRA has the ability to do this within the current framework and without compromising its own compliance with the regime or the prospects of a subsequent equivalence ruling with the EU.
Making wholesale amendments to the UK’s implementation of Solvency II could seriously reduce the likelihood that the EU will find the UK to have an equivalent third country regime. This will be important for harmonising reinsurance market access across the 27 member states.
The UK should avoid market fragmentation, ensuring that it continues to work towards international regulatory convergence, which eases cross border trade of (re)insurance services. This is something highly valued by international clients coming to the London Market. An exercise to re-design the UK’s insurance solvency system will require UK insurers to embark on new and potentially large programmes of operational and systems change. We believe that there is little market appetite for this.
International Competitiveness Duty for the regulators
As the UK takes up a more global role outside of the EU, regaining sovereignty over its regulatory rule book gives us the opportunity to ensure that the UK remains the world’s global financial services hub, facilitating business and creating growth across all four nations. We believe this is best achieved by ensuring that our regulators are mindful of our competitive position globally, through an international competitiveness duty for the regulators. We have elaborated upon this argument in answer to question 12.
The future UK trading regime should seek to encourage open markets for large commercial risks., building on the UK’s strength as an open economy attracting international investment and talent. This can be achieved by seeking to ensure the removal of local restrictions, mutual recognition of rules and standards, and greater regulatory cooperation.
The challenge is that many economies have in place local restrictions on the amount of reinsurance that can be bought from overseas providers and prevent entirely the UK Insurance Market providing primary insurance.
The Global Reinsurance Forum (GRF) regularly reviews and compiles information on trade barriers to the provision of commercial insurance services across borders. The GRF has identified 45 major territories around the world which have either implemented, or are in the process of implementing, barriers to the transfer of risks through global reinsurance markets. Many of these countries and territories are target markets for the UK. The barriers identified by the GRF include:
Much of this does not necessarily need a formal free trade agreement and the UK Government and regulators can make progress now by using the full range of tools available to them, in the form of Financial and Financial & Economic Dialogues, High Level Talks and regulatory working groups, that it has with target markets, to take forward these discussions and promote the insurance market.
The UK Government therefore needs to work with the industry and representative bodies such as the London Market Group, to present a case to reduce these barriers which focuses on the value that the Market can deliver for those countries and their businesses.
The UK regime provides a robust, sensible and proportionate regime for dealing with third-countries. The restrictions to foreign participation in the London Market are non-discriminatory and exist to ensure that firms cannot operate without sufficient approval and regulation.
Government should be mindful that most jurisdictions will seek reciprocal benefits. The UK has a relatively strong commercial presence in insurance, so the benefits of market liberalisation in the sector may appear a little one-sided. However, one of the benefits of the UK and particularly London, is the fact that the large specialty risks both domestic and international come to London. This means new entrants can leverage expertise here rather than deploying additional talent in a number of dispersed jurisdictions which makes it an attractive location in which to grow business.
The UK should be proactive in promoting the opening-up of international insurance markets based on mutual market access, home state supervision and no host state financial requirements. The London Market is a substantial net exporter of services, so it is very much in the UK’s national interest to maintain open markets worldwide. This will ensure that London Insurance Market firms can continue to meet and respond to overseas commercial insurance and reinsurance needs either on a cross-border basis or by way of local branches.
The unequalled pool of global talent and expertise assembled in the UK is a major competitive advantage for the commercial insurance industry. To retain its status as the leading global centre, the UK needs continued access to the best talent, a mixture of home-grown, from across the EU and from the rest of the world. Future UK immigration policy should be designed to broaden the future pool of international talent that the industry can access. It must also facilitate intra-company transfers of staff between different locations around the world.
In particular, EU nationals working in the London Insurance Market should be reassured that they will be able to continue to remain in the UK post Brexit, whilst new talent should not be deterred from coming to the UK by the uncertainty of their future status. The UK must not impose quotas or other barriers which inhibit the movement of the highly skilled and diverse workforce the London Insurance Market requires to work effectively on an international basis.
Clients come to London because of its ability to design products to meet their complex requirements for global risks. They also look to London to create new solutions designed to cover their emerging risks. This ability to design and develop new approaches – which the London ecosystem in uniquely structured to support – requires a flexible regulatory approach.
To help achieve this we would like to see an expansion of the FCA’s Sandbox approach to regulated activities by the PRA, which would make the UK a more attractive place to develop new products and services, by both existing and new entrants to the market. This would create a conducive and contained space where innovations at the edge of, or even outside of, the regulatory framework can be tested. This is an approach we believe would have benefited and sped up the development of an Insurance-Linked Securities market. Such an approach would bring down costs of innovations and reduce barriers to entry, while allowing the UK regulators to collect valuable information prior to approval.
We believe there are a range of activities that the regulators could undertake to evidence their commitment to maintaining the UK as an attractive and competitive place to do insurance business:
We welcome the scrutiny function provided by the Committee, as well as the former House of Lords Financial Affairs Sub-Committee and now the work of the House of Lords EU Services Sub-Committee.
While both committees do consider financial services as part of their remits, we note there is now an absence of a Committee (or sub-Committee) specialising and focusing exclusively on financial services. We would welcome the formation of either a joint Commons and Lords Committee, or a dedicated Sub-Committee to the Treasury Select Committee, to consider financial services more regularly and in greater depth. A new financial services committee could provide a more focused forum for ongoing scrutiny of the work of the regulators.
The new Committee - perhaps comprised of members of both Houses, ideally drawn from members of the Treasury Select Committee and the EU Services Sub-Committee - could look in detail at specific pieces of financial services regulation. We would propose that the Joint Committee or Sub-committee have the following powers and attributes:
While we understand the Government’s desire to delegate powers to financial regulators, it is crucial that sufficient accountability frameworks are in place to ensure decision-making takes into account the broader context of the global trading environment, particularly in respect of innovation, consumer demand and competitiveness.
New scrutiny mechanisms must also have the ability to challenge the regulators if it can be shown that regulatory changes would be detrimental to the UK market, contrary to their statutory or public policy objectives or out of step with international best practice.
HM Treasury’s FRF Review consultation document suggests a number of options for adapting stakeholder engagement with the policy making process and we have given our views on how they should be reformed:
Industry representation and input
A dedicated forum for domestic regulatory changes and to ensure an ongoing and formal dialogue between Ministers, HM Treasury, the regulators and industry. For such a forum to be successful and to ensure proper and meaningful industry engagement, we would ask the Government to consider the following attributes:
More broadly, we would suggest the following changes could be made to involve industry and strengthen the policy making approach of the regulators, thereby further strengthening the accountability mechanisms on the regulators’ actions:
In terms of developing its own regime for post-Brexit commercial insurance trade the UK should actively push for greater market access, regulatory dialogue and the removal of trade barriers; ensuring that domestic regulation and competition are sufficient and proportionate to achieve prudential goals, without sheltering anti-competitive and discriminatory regulation.
The open nature of the London Market means that using an equivalence framework as a tool to manage reinsurance trade with other third countries - through a regulatory measurement as a condition for market access - is not the preferred solution.
Instead, the assessment should be outcome-based; it should assess to what extent the respective third-country regulatory and supervisory framework achieves similar and adequate regulatory effects and to what extent it meets the same objectives as the UK. Trade should not be prevented by technical divergence between the UK and other third countries if the achieved outcome of the regulation is the same.
Importantly, engagement with third countries should be conducted on a case-by-case basis, in respect of the intricacies of territories’ commercial insurance regulations. For example, in many cases, Free Trade Agreements (FTAs) may not be the most optimal tool and the UK Government should use the full range of tools available, including economic and financial dialogues, regulatory cooperation, multilateral trade talks and market promotion.
We would instead suggest that the UK regime seeks to have the following high-level structure, the details of which can then be further negotiated with individual countries depending on the specific nature of those discussions and markets:
A regime built on this structure would allow the UK to cooperate with other countries and businesses that achieved similar regulatory outcomes reached in a similarly transparent manner. Ultimately this could provide countries with a growing (re)insurance demand for access to the London Insurance Market and its world class expertise in developing and managing large and complex policies. While this may not lead to the formal convergence of international regulatory regimes, we believe it will help to promote recognition of approaches based on achieving similar regulatory outcomes.
The emergence of new centres of capital in places such as Singapore, Dubai and Miami and has significantly increased the number of markets able and willing to write risks that previously might have had no choice but to go to London. While these new centres do not currently have London’s depth of knowledge or expertise, they are a lot cheaper to operate in. Over time our concern is that these new centres will become far more viable alternatives and compete for premium, putting further pressure on London’s share.
It is the London Market Group’s belief that international competitiveness should have a more prominent role within our regulatory framework. The London Market Group believes that the regulators’ statutory objectives should be expanded under the new framework.
The London Insurance Market is a truly international, export driven industry, attracting large commercial and specialty business from over 200 territories around the world. The London Market’s strength lies in encouraging inward investment. Over 66% of the London Market’s business relies on foreign capital. The London Insurance Market needs to ensure it is the most attractive and competitive place globally to retain existing clients and keep attracting new business.
International insurance and reinsurance hubs in Bermuda, Switzerland and Singapore are regulated by bodies mandated to promote their domestic markets, ensure they are attractive places to do business and promote the reputation of those markets. These markets are seeking to make their regulatory environments as attractive as possible and in some cases actively benchmarking their regulatory regimes against other locations.
Differentiated regulatory approach
We believe a more stratified and proportionate approach to individual sectors within the insurance industry and the type of client they serve would be beneficial and aid UK international competitiveness, with separate models for personal lines, commercial lines and reinsurance which reflected the nature of the risks of these different sectors. Individual consumers and SMEs will still need consumer like protection but large corporate clients who have their own professional brokers and advisers need much less.
We would welcome a regulatory approach which recognises the nuances between the different insurance markets that operate within the UK and allows the regulators to develop regulatory models which can better support these valuable markets, allowing them to deliver wider benefits to the UK economy and international investment.
As part of deepening the activity-specific approach, we would welcome further consideration of recognising within the public policy considerations for the regulators, the distinction between commercial insurance and reinsurance brokered and underwritten in the London Market, and personal lines business, which differ significantly in nature and could have different regulatory objectives.
The commercial insurance market, including the London Market, is of a fundamentally different character to that of the domestic life and pensions market. Clients seeking insurance for large risks are significant firms with strong risk management capability who either employ internal expertise or procure reliable external advice. Clients’ interests are almost always represented by professional brokers throughout London Market placements. This enables them to make an informed choice as to their insurance provider and the structure of their programmes.
The London Market is also more international in character, bringing clients and investors from across the world into the UK. Its strength lies in its concentration of capital and expertise which draws business to London from around the world. This ensures the London market makes a material contribution to the UK’s exports and in encouraging inward investment into the UK. Much of this investment comes from EU entities - over 66% - who choose to do business in London. That capital and expertise is mobile, the international insurance market is highly competitive and the impact of regulation is inevitably a factor in both the perception and the reality of the UK as a place to do business.
Below we have set out three examples of how the UK regulators’ current ‘one size fits all’ approach is affecting competitiveness and investment in the London Market.
In interpreting its current FSMA objectives the FCA makes almost no distinction in the way it supervises a London market specialty broker serving a corporate client, from the way it supervises a retail insurance broker dealing with an individual’s domestic and motor insurance requirements. As the FCA’s own Wholesale Insurance Broker Market Study in 2019 demonstrated, corporate clients seek specialist broking services because they recognise that the advanced expertise housed within broking firms can assist them in reaching the optimal outcome for their risk management programme and deliver the right value for any insurance purchases they may make as part of that programme. These are not consumers in need of protection in the way that individuals or SME customers may be. In particular, we believe that the nature of London’s commercial specialty intermediary market must be better recognised and reflected within the statutory framework and the FCA’s future objectives, to ensure that a proportionate level of regulation is undertaken. Finding a structured, risk-based and proportionate solution that works for brokers operating in specialty markets is critical to the whole of the London Market’s continued success.
The London Market Group is NOT seeking a reduction in UK regulation or a dilution in UK regulatory standards. We believe that Solvency II, a system which the UK was instrumental in developing, should continue to be the basis of UK insurance regulation to avoid damaging market fragmentation.
International clients and investors see adherence to these standards as a benefit of doing business in the UK. A client will come to the London Market because they can get the global insurance cover they need for commercial activities such as aviation, shipping or global property portfolio in one market from the world’s leading experts.
As outlined in response to question 12, we believe a more stratified and proportionate approach to individual sectors within the insurance industry and the type of client they serve would be beneficial and aid UK competitiveness, with separate models for personal lines, commercial lines and reinsurance which reflected the nature of the risks of these different sectors. Individual consumers and SMEs will still need consumer like protection but large corporate clients who have their own professional brokers and advisers need much less.
This distinction is recognised by many of the international jurisdictions the London Market operates within such as the EU and US states. Large commercial risk is recognised within the EU’s regulatory framework, including the Solvency II legislation, and is also a distinction made by many US states within their regulatory regimes, with similar concepts known as ‘industrial risk’ and ‘sophisticated commercial buyers’.
The concept of a ‘professional client’ is also well recognised, with a clear and consistent definition provided within the FSMA framework, the regulatory handbooks, and the on shored EU legislation.
We would also point the committee to the consumer research published as an appendix to the FCA’s Wholesale Insurance Broker Market Study in 2019, which highlighted that sophisticated clients who understand the complexity of specialty insurance markets, understand the specialist expertise that they get access to by hiring a broker and are clear how and how much they pay their broker and consider it excellent value for money.
These examples emphasise that many key jurisdictions, as well as the UK, acknowledge that firms writing risks for commercial clients for sophisticated corporate clients, do not require the same regulatory measures as those products and services designed for a retail client.
 Lloyd’s: A World at Risk, 2018
 FINMA Annual Report 2019
 U.S. GAO - Financial Services Regulations: Status of GAO Recommendations to Enhance Regulatory Analyses and Interagency Coordination
 Bermuda Monetary Authority: https://www.bma.bm/the-bma-s-role
 MS17/2.2: Wholesale Insurance Broker Market Study - Final report (fca.org.uk)
 Definition: a captive is an alternative to self-insurance in which a parent group or groups create a licensed insurance company to provide coverage for itself.
 Central Bank of Ireland, Corporate Governance Requirements for Captive Insurance and Captive Reinsurance Undertakings 2015
 Article 13
 Locke Lord: Surplus Lines - Locke Lord LLP
 COBS 3.5 Professional Clients, FCA Handbook
 Article 4(1)(10) MIFID