Lloyd’s of London - Written evidence-(CIR0020)

Lloyd’s Response to the House of Lords Industry and Regulators Committee Inquiry on Commercial Insurance and Reinsurance Regulation

Introduction

1. This written evidence is submitted on behalf of the Society of Lloyd’s (“Lloyd’s”). Lloyd’s is a Society of Members incorporated under the Lloyd’s Acts 1871-1982, which operates as an insurance and reinsurance market based in London. Lloyd’s is not an insurance company: policyholders are insured at Lloyd’s, not by Lloyd’s. All insurance business in the Lloyd’s market is underwritten by Lloyd’s members, organised into 89 active syndicates, managed by managing agents. The Lloyd’s Market Association represents the 50 managing agents and three members’ agents in the Lloyd’s market. The risks insured in the Lloyd’s market primarily come from sophisticated commercial customers that operate across the world: 88% of the market’s £35.5bn premium income in 2020 originated outside the UK. Appendix 1 contains further details of Lloyd’s business and operations.

2.                                                                                                                                                                                                                                                                                                                  Lloyd’s has a substantial interest in the questions asked by this inquiry, which focus on the international competitiveness of the UK’s commercial insurance market. Much of the business written at Lloyd’s and in the wider London insurance market (“the London Market”) is either reinsurance or specialty direct insurance. This includes marine, aviation (including space risks), energy, goods in transit and non-marine classes such as cyber, terrorism, political risks, directors and officers and professional indemnity. London’s importance as a centre for the underwriting of such risks illustrates the concentration of capital and expertise in the UK that supports this business.

3.                                                                                                                                                                                                                                                                                                                  The purchasers of these covers are mostly sophisticated commercial clients, with access to knowledge and market expertise. There is greater equity of bargaining power between the parties to such insurance contracts than exists for “mass market” personal lines such as household, motor and travel insurance. Clients are looking for the best price and cover they can obtain in global markets, and do not want to be restricted to their local markets.

4. Lloyd’s (formally, the Council of Lloyd’s) is responsible for managing the affairs of the Society and has powers to regulate and direct the business of insurance at Lloyd’s. In this sense, Lloyd’s acts as a regulator and therefore maintains Memorandums of Understanding with the Prudential Regulation Authority (“PRA") and the Financial Conduct Authority (“FCA”) which set out the approach to cooperation on the supervision of insurance business at Lloyd’s.

5.                                                                                                                                                                                                                                                                                                                  Lloyd’s and Lloyd’s managing and members’ agents are authorised persons under the Financial Services and Markets Act 2000 (as amended; “FSMA”). As the EU Solvency II Directive recognised “the association of underwriters known as Lloyd’s” as a legal form of insurance undertaking, the UK implementation of Solvency II is such that it applies to Lloyd’s as a whole. Market compliance with the regime means that managing agents and the syndicates that they manage must operate in accordance with Solvency II.

Executive Summary

6. Lloyd’s is strongly supportive of the high quality, world-leading regulatory framework in place in the UK, which is a key factor in attracting insurance business and capital into the London Market. The core components of the Solvency II framework in place for insurers provide a robust risk and capital regime which has been well implemented by the UK industry, and maintaining this will allow London Market carriers to be seen as well-governed and capitalised on equivalent terms to their international competitors.

7. However, for the London Market to compete fully for global business and to respond to the UK’s growth objective, it is imperative that the UK regulatory regime adapts to better enable growth and innovation which attracts investors and customers to the UK, while maintaining the high standards that have become synonymous with UK financial services regulation and supervision. We want to see an agile, responsive and facilitative approach from supervisors, where they think critically about how to apply the UK’s high-quality regulation to the specific nature of the commercial insurance and reinsurance business of the London Market.

8. Following its exit from the EU, the UK now has an opportunity to use its newly re-acquired power of self-determination to ensure it maintains its leading position as a global insurance market. Events such as the Covid-19 pandemic, and the increasing prevalence of cyber risk, have heightened awareness of the systemic risks which have the potential to impact national and global economies. The London Market is a global leader in providing insurance cover for these types of complex, specialist risks, and this inquiry is an important opportunity to adapt the system of regulation to better support the growth and competitiveness of the market.

9. Lloyd’s is in a unique position to contribute to this debate as both a regulated firm and a regulator, whereby we seek to balance the need for effective supervision with the requirement to grow and promote our market. To better achieve this aim, Lloyd’s has recently introduced a risk- and outcomes-based market oversight framework called the ‘Principles for doing business at Lloyd’s’, which sets out the fundamental responsibilities placed on all managing agents in order to support the market’s overall performance, financial strength and reputation. Under this approach, the more material a syndicate is, the higher our expectations will be, and the nature and extent of Lloyd’s oversight and interventions will be adjusted accordingly. While underperforming businesses will be subject to a range of remediation interventions, those businesses at the top end of the scale will receive a range of incentives to help such firms grow and thrive.

10.                     Our innovation accelerator, the Lloyd’s Lab, has welcomed over 80 cutting-edge InsurTech businesses and led to the creation of dozens of partnerships and new products. And through its simplified entry processes and proportionate capital requirements, our ‘syndicate in a box’ initiative enables new accretive and innovative businesses and talent to enter the Lloyd’s market. We are also undertaking a once-in-a-generation modernisation project called the ‘Future at Lloyd’s’ to use the opportunities of digitalisation to reduce the costs of the market and increase its productivity. These initiatives sit alongside our long-standing proactive approach to seeking new global trading opportunities and market access by engaging with governments, regulators and local industry. In the context of market development, we welcome the FCA’s Regulatory Sandbox and the joint PRA-FCA New Insurer Start-up Unit initiatives, and we encourage the regulators to pursue such industry development strategies further.

11.                     Our experience is that for any market to be successful, strong oversight must be delivered alongside the objective to facilitate innovation and growth. Regulators therefore need their incentives to be aligned with this dual-perspective and to be made accountable for success in both. As with the businesses they regulate, the regulator’s performance must be measured not solely by an absence of failure, but also by the extent to which they have created success. We therefore strongly support the Government’s proposed growth and international competitiveness objective (“Competitiveness Objective”) as this will incentivise the regulators to more formally consider the success of the UK financial services sector as part of their remit.

12.                     However, this legislative amendment will not drive change in itself. The accountability framework which accompanies the Competitiveness Objective must incentivise the regulators, at both an institutional and an individual level, by establishing meaningful ways of assessing their performance. In order to be successful, the Competitiveness Objective needs to be embedded, from the setting of the regulator’s strategy, through to their day-to-day supervisory tasks.

13.                     The accountability framework would help embed and operationalise the Competitiveness Objective and lead to manifold benefits, such as reducing the daily regulatory and supervisory burdens that already demand excessive resource from firms. Doing so would improve the industry’s competitive position for attracting international customers, businesses, innovators and investors.

14.                     Overall, Lloyd’s believes that the UK must use this once-in-a-generation opportunity to enhance our world-leading regulatory and supervisory system to match stability and protection with agility, growth, proportionality and innovation.

David Sansom

Chief Risk Officer

Lloyd’s

Question 1. Is the UK regulatory framework appropriate for the commercial insurance and reinsurance sectors?

And

Question 2. To what extent do the Bank of England and Financial Conduct Authority apply and interpret regulatory policy in these areas in a proportionate manner and strike the right balance between regulation and competitiveness?

15.    The UK regulatory framework is recognised as one of the most sophisticated and robust in the world. However, the international competitive landscape is changing quickly, making it imperative for the UK Government and regulators to preserve this reputation, continue its alignment with international standards and consider how to enhance its standing going forward.

16.    We do not support a wholesale overhaul of substantive insurance regulation in the UK. In particular, Solvency II is a world-leading framework which has made significant improvements to the industry’s prudential position and therefore gives assurance to international buyers of our products that we have the capital strength and risk management expertise to pay claims as they fall due. That said, there is significant scope for making the UK regulatory framework’s operation more proportionate, agile, risk-based and forward-looking. Doing so would enhance the UK’s international competitiveness without compromising the supervisory outcomes that regulators pursue in the sectors that have high potential for consumer harm.

Supervisory processes

17.    In particular, we find that the UK’s supervisory processes increase costs and expand timescales. Given that supervisory processes are a key driver of ‘business as usual’ costs and of the speed in which firms’ goals can be achieved, they are a fundamental component to the competitiveness and attractiveness of UK as a financial centre.

18.    Whilst regulators seek to discharge their regulatory and supervisory mandates in a proportionate manner, practice can fall short of this objective. We estimate that we had approximately 300 meetings with the UK financial regulators in 2021, with the majority scheduled at request of regulators and not forming part of the regular engagement framework. This practice is resource-intensive as meetings require a significant amount of preparation and subsequent action, often from our executive-level staff.

19.    Importantly, the number quoted above does not include meetings that regulators have with managing agents, which by their nature would often overlap in purpose and content with those that we hold with them as part of our supervisory mandate. Such duplication of supervisory effort is burdensome on all those involved and we hope the outcomes of the HM Treasury’s recent consultation will give rise to changes at the regulators that address this approach.

20.    Such intensive interaction also has a stifling effect on innovation, as it directs firms’ efforts towards activities associated to that interaction, thereby reducing the amount of resource that could be dedicated to developing new products, for example. Similarly, we find that conversations with regulators very rarely cover increasing the attractiveness and competitiveness of the UK insurance market and what role the industry can play in this. By contrast, regulators in other jurisdictions where Lloyd’s operates often challenge us on our approach to innovation and, by extension, how we can contribute to the attractiveness of the relevant insurance markets.

21.    We acknowledge that the nature and scale of Lloyd’s requires intensive supervisory engagement and consider that our interaction with regulators, particularly in our capacity as regulators of the Lloyd’s market (discussed in more detail in paragraphs 38 to 48), is open and constructive. We believe, however, that there is scope for improving the interaction to make it more efficient and proportionate. As such, we welcome the ongoing discussions that we have with the regulators about achieving this outcome and we will be sharing our own plans to systematise the interaction that we have with the Lloyd’s market participants in the hope that this will serve as a useful example of streamlining engagement efforts.

22.    We also observe that certain supervisory processes do not operate effectively, including lengthy and uncertain timelines and procedures. For example:

• We understand that only five insurance-linked securities (ILS) deals – an alternative risk financing mechanism which allows insurers to transfer some of their risks to capital markets – have been launched in the UK since the relevant HM Treasury regulations were introduced. This contrasts with the 18 vehicles established in Singapore over a similar period of time[1], with ‘speed to market’ often quoted as a reason for this difference in outcomes. In another example, Bermuda, a jurisdiction that has built a strong reputation over the last decade for its business-friendly ILS regime, particularly its swift registration process, registered 27 Special Purpose Insurers in 2021 which followed a record number of 30 registrations in 2020[2]. Recognising the importance of the ‘speed to market’ factor, the BMA announced in August 2021 that it will aim to further reduce the registration process for Restricted Special Purpose Insurers to three business days[3].

• Approval for Senior Management Functions is often delayed, as submission of the application may be disrupted by systems issues, and the regulators often go beyond their target of 90 days to make an approval determination.

• Internal model change approvals are lengthy and unnecessarily complex, thus denying firms the opportunity to adapt their capital frameworks to evolving economic and market issues in a timely manner.

• We understand that applications for Part 4A authorisations for new firms (and for branches that previously operated in the UK under the Freedom of Establishment arrangement) can be complex, unnecessarily drawn-out and involve substantial information requirements. In a recent example, it took around a year for a small Lloyd’s managing agent to be approved by the PRA.

23.    The negative perceptions that are created by this experience can be damaging for the UK’s competitiveness, particularly as they relate directly to the ability of overseas businesses to come and operate in the UK, and might therefore deter investment and business opportunities in the future.

Competitiveness Objective

24.    In this context, we support HM Treasury’s proposal to introduce a statutory Competitiveness Objective as it will, if effectively implemented, incentivise the regulators to more formally consider the success of the UK financial services sector as part of their remit. This is important given that the regulators’ rule-making powers are expected to increase significantly under HM Treasury’s other proposals developed within the Future Regulatory Framework Review.

25.    However, this legislative amendment will not drive change in itself. We expect that the new Competitiveness Objective will require a significant shift in the regulatory mindset whereby policymaking and supervisory staff will need to incorporate new factors and considerations in both long-term strategic planning and daily decision-making. If the new objective is not implemented effectively, it will not work. As such, it is important to consider how the PRA and the FCA can operationalise it and what additional support will be necessary to facilitate its delivery in the most effective and efficient way. This will be particularly critical at the early stages of the objective being applied to ensure that implementation of the Government’s policy has the desired effect.

26.    The accountability framework which accompanies the Competitiveness Objective must incentivise the regulators, at both institutional and individual level, by establishing meaningful ways of assessing regulators’ performance. Such assessment needs to cover day-to-day supervisory tasks, market promotion activities, and the competitive standing of the UK financial services sector in its global context. Without such an accountability framework, we do not believe the regulators’ activities will shift from their sole focus on prudence and protection to the nimble, proportionate and growth-focused mindset that the UK now needs.

27.    Particular consideration should be given to how the objective should apply in the context of the regulators’ supervisory activities, not just their rulemaking function. As suggested above, the UK’s ability to operate as a competitive jurisdiction relies heavily on the daily interaction between firms and their regulators which, in turn, is dictated by the regulators’ interpretation of the rules; for example, their application of the proportionality principle. Given that supervisory processes are a key driver of ‘business as usual’ costs and of the speed in which firms’ goals can be achieved, they are a fundamental component of the competitiveness and attractiveness of a financial centre.

28.    We also believe that this measure will be insufficient in the absence of any other processes that would trigger competitiveness considerations in regulatory policymaking and supervisory activities. It is in this context that we propose that policymakers adopt a proactive and holistic approach to competitiveness. Whilst we discuss the features of the proactive approach immediately below, our views on the holistic approach are outlined in response to Question 4.

Proactive approach to pursuing competitiveness in the UK

29.    We believe that successful operation of the objective will be driven by a proactive approach to the growth and competitiveness agenda. For example, it will be insufficient to reduce responsibilities under the Competitiveness Objective to the analysis of whether new regulatory proposals affect the international competitiveness of the UK economy and the financial services sector. Regulators should go beyond this and take a much more strategic and structured approach to promoting the UK’s competitiveness, including the publication of a growth and competitiveness strategy in their annual business plans.

30.    The UK’s future success as an attractive destination for international businesses and their customers depends on the regulators’ ability to keep in step with global trends and developments in the financial services industry and its regulation. This requires a proactive monitoring of, and engagement with, international trends to support the UK’s continuous relevance in the global financial markets.

31.    In our response to HM Treasury’s recent consultation, we encouraged the Government and regulators to consider what mechanisms could be introduced within the PRA and the FCA to enable this proactive consideration of how to maintain and enhance the UK financial services industry’s competitiveness. For example, the operational structure of the Monetary Authority of Singapore (MAS) contains a Financial Centre Development Department (FCDD) that:

‘supports the growth of Singapore as an international financial centre through nurturing an attractive and conducive business environment for financial institutions, and deepening Singapore’s position as a pan-Asian banking hub. The department fosters key strategic activities and capabilities that contribute to these objectives’[4] .

32.    FCDD has a broad scope of responsibility which, for instance, includes organising the annual Fintech Festival in Singapore[5]. It established the Global-Asia Insurance Partnership that brings together insurance industry, regulators, policymakers and academia to address the future development and needs of the insurance sector, with particular focus on addressing the protection gap in the region[6] . Another joint forum – the Cyber Risk Management project – sought to foster an efficient cyber insurance marketplace (e.g. through the development of quality data and quantification tools) and, as a result, help Singapore become a cyber centre of excellence[7] .

33.    Implementing a structured approach to pursuing the Competitiveness Objective will enable UK regulators to identify emerging opportunities and threats and develop an appropriate response. This will also help UK regulators consider what elements of competitiveness require development of a dedicated strategy to support the UK’s financial services industry. For instance, ILS has seen significant growth across the world in the last few years and different jurisdictions already contend for ‘hub’ status by implementing dedicated programmes to become an ILS destination of choice.

34.    Whilst we do not suggest that examples from other regulatory jurisdictions should be directly applied in the UK, they do offer helpful illustrations of how certain regulators support their industry’s international standing without compromising regulatory outcomes.

35.    For example, in Singapore, MAS has adopted a three-pronged approach to grow the ILS market and ecosystem, which it describes as follows:

• Improving data quality and the standardisation in the region to develop industry-loss based indices upon which ILS can be structured.
• Establishing and enhancing Singapore’s regulatory, tax and legal infrastructure to support various ILS instruments.
• Developing Singapore ILS ecosystem through incentivising ILS issuers to domicile their ILS in Singapore through grant schemes, encouraging ILS service providers to anchor their operations there.

36.    The grant scheme mentioned above funds 100% of upfront ILS bond issuance costs (subject to a SGD 2 million cap) covering all forms of risks such as longevity, mortality and operational risks, beyond just natural catastrophes[8] .

37.    Similarly, Hong Kong aims to be a preferred ILS domicile building on its position ‘as a global risk management centre and insurance hub’. As part of this, the Insurance Authority of Hong Kong has recently announced details of a two-year Pilot ILS Grant Scheme to encourage the development of the ILS market in Hong Kong. The Scheme offers grants to eligible ILS issuances in Hong Kong to cover up to 100% or HKD 12 million of upfront costs. Additionally, the Hong Kong Monetary Authority established a Centre for Green Finance in 2019 that seeks to promote Hong Kong both as the hub for green finance in Asia and the importance of sustainability within infrastructure investment and financing[9].

Lloyd’s perspective

Lloyd’s oversight framework

38.    In its capacity as a market regulator, Lloyd’s is familiar with the inherent challenges associated with a requirement to balance financial stability and conduct considerations with the need to support the development and competitiveness of the businesses that operate within our ecosystem.

39.    Lloyd’s has the power, principally via the Lloyd’s Act 1982, to develop and enforce its own rules for the Lloyd’s market. As part of its Oversight Framework, Lloyd’s is in the process of implementing the ‘Principles for doing business at Lloyd’s’ (‘Principles’) which set out the fundamental responsibilities expected of all Lloyd’s managing agents in order to support the market’s overall performance, capital strength, and financial and reputational credibility.

40.    The recent changes will create clarity, transparency and efficiency across the market; provide a way of differentiating managing agent approaches based on their materiality; and allow managing agent senior management to interpret and apply Lloyd’s expectations in the way most appropriate to their business. Importantly, application of the Principles is done on the differentiated basis, which provides the best run syndicates the space to grow, whilst at the same time ensuring appropriate and proportionate oversight across the businesses performing poorly against Lloyd’s financial and non-financial expectations.

Lloyd’s Lab

41.    Maintaining Lloyd’s attractiveness as a destination for investment and insurance risk is one of the Corporation’s key functions. We therefore continuously seek to identify opportunities to enhance our value proposition to benefit from existing opportunities as well as prepare for any competitiveness challenges.

42.    As an example of our commitment to continuous development, Lloyd’s operates a tech incubator, The ‘Lloyd’s Lab’, which gives start-up firms access to the Lloyd’s market and the chance to develop their ideas alongside their target audience. Since its launch, the Lab successfully ran seven cohorts which involved over 80 teams that have:

• Facilitated the creation of dozens of partnerships and new products;
• Enabled the delivery of COVID-19 vaccines to low and middle-income countries;
• Helped us measure the carbon footprint of the customers we insure;
• Demonstrated how insurance products can avert disasters before they happen;
• Connected the market to create products which pay out when critical clouds fail.

43.    As a specific example of the Lab’s success stories, Previsico has developed a new flood forecasting technology in the course of its participation at Lloyd’s Lab, which provides actionable property level warnings up to two days in advance and crucially includes surface, fluvial and coastal flooding. In the Lab they created a new way of delivering the insights to customers, and worked with Lloyd's syndicates to evaluate the commercial model. The company’s tool attracted praise from multiple stakeholders, including Luana Avagliano, Head of ResilienceDirect at Cabinet Office: ‘This is ground-breaking work that will immensely assist our resilience community in making informed decisions for planning and response to flood events and impact’[10].

44.    Importantly, participants in the Lloyd’s Lab’s previous cohorts have come from a variety of countries, including the US, Canada, Israel, South Africa, Singapore, Portugal, Spain, France, Germany, Switzerland as well as the UK. As a rough estimate, there is about a 50:50 split between the UK and non-UK start-ups that have participated in the Lloyd’s Lab.

‘Syndicate in a Box’

45.                     Lloyd’s also developed ‘syndicate in a box’ (“SIAB”) to encourage new, accretive and innovative business to benefit from Lloyd’s value proposition. Further to three SIABs approved in 2020-21, Lloyd's launched two further syndicates in January 2022: (i) ESG syndicate 4321 which offers additional capacity to businesses that perform well against ESG metrics and provides cover in various lines, including marine hull & cargo, aviation and financial classes and (ii) MCI 1902 which provides niche Medical coverages. There are a number of further SIAB proposals that we anticipate will go live in 2022, including MIC 5183 which has recently received an in-principle approval to offer digital micro-insurance and embedded insurance services to underserved communities.

46.    There are a number of further SIAB proposals that we anticipate will go live in 2022, including MIC 5183 which has recently received an in-principle approval to offer digital micro-insurance and embedded insurance services to underserved communities.

47.    The constraints on what business can be written, their smaller scale and the rules surrounding their underwriting permission, will limit the risk posed by SIABs. This means Lloyd’s can disapply some of the capital-setting rules that are applied to new syndicates in their first three years. Lloyd's can also establish oversight and underwriting rules proportionate to the risk posed. This will reduce the initial capital requirement, administrative burden and operating costs, enhancing their chance of success, without reducing Lloyd’s market standards.

48.    Ki, a fully digital algorithmically-driven ‘follow only’ syndicate (not a SIAB) developed by Brit and Google Cloud, was approved in 2020, and commenced underwriting from January 2021, also delivered against the aspirations of the Lloyd’s vision from the technology perspective.

Conclusions

49.    These initiatives offer an example of a balanced regulatory approach between prudency and growth. Whilst rigorously overseeing the market, Lloyd’s undertakes promotional activities, works with the market to facilitate innovation of new products, and takes a proportionate and agile approach to supervisory tasks.   In this context, we welcome the PRA’s and FCA’s joint initiative, the New Insurer Start-up Unit, which was set up with the aim of improving the authorisation process for prospective new insurers in the UK. Providing clear guidance for businesses that consider becoming authorised insurers is an important signal that the UK is open for investment and customers.

Question 3. How do the activities of the UK’s financial regulators affect the ease of carrying out commercial insurance and reinsurance business in the UK? What impact does this have on the availability and cost of insurance cover in the UK?

And

Question 5. What improvements could be made to the regulation of commercial insurance and reinsurance in a post-Brexit context?

50.    As mentioned above, the UK regulatory framework enjoys a strong reputation globally. When faced with significant threats to the proper functioning of the insurance markets, UK regulators seek to take decisive measures to avoid or minimise harm.

51.    The FCA’s decision to launch a test case to seek clarity from the High Court on the application of business interruption insurance policies is a good example of regulators taking decisive and proactive measures to get certainty for both customers and the industry. Similarly, the PRA’s clear articulation of its expectations on the prudent management of cyber underwriting risks was an appropriate intervention to manage the risks associated with the fast-developing class of business. Lloyd’s went through a phased exercise that required all policies to be clear on whether they provide or exclude cyber coverage. Achieving full clarity of cyber coverage required a significant commitment of resource by managing agents and brokers, but this was an essential measure to manage the systemic potential of cyber exposures.

52.    However, there are aspects of the regulatory framework and its application that could be improved in the context of the London insurance market. In addition to the supervisory processes we mention in paragraph 22 above, we set out further key examples below.

Proportionality principle

53.    FSMA provisions currently require UK regulators to have regard to the principle that a burden or restriction should be proportionate to the benefits, considered in general terms, as expected to result from the imposition of that burden or restriction. However, we have observed that the principle’s practical application can fall short of its intended objective. We therefore believe that it should be strengthened to require regulators to avoid introducing requirements which are expected to result in unnecessary burdens (including where the expected benefits will be outweighed by the implementation costs). HM Treasury’s current proposals to improve the governance and effectiveness of the regulators’ cost-benefit analyses are welcome as such analyses provide a direct assessment of proportionality.

54.    Regulators should review their requirements regularly to ensure they remain aligned with this principle, particularly (i) to take advantage of the new technologies where they facilitate reducing the compliance burden or (ii) to evaluate requirements which were developed for a context which has become outdated and therefore generates redundant activity with no benefits. Similarly, a risk-based approach to firms must form the basis of any regulatory or supervisory decisions to ensure that individual firms are not unduly burdened given the risk they may present. For the UK to remain an attractive and competitive global financial hub, it is essential that regulators are guided by the risk-based principle of proportionality in both policy-making and supervisory activities.

Clarity of the regulatory rules

55.    The scope of certain UK regulations does not take account of the London insurance and reinsurance market’s specificities, including its international nature and its sophisticated commercial client base which has access to specialist advice. This results in a significant compliance burden, by which London market firms can in some instances be left with the obligation to comply with UK regulation across multiple jurisdictions.

56.    Challenges also arise where the scope of regulations is unclear as this creates uncertainty for businesses and, consequently, additional regulatory burden and costs for processes which might have been unnecessary, if rules were clearly defined. In situations of uncertainty, we have found that UK regulators feel the framework does not permit them to provide definitive answers on the interpretation of their rulebooks, which creates uncertainty and delay for firms, and increases the need for expensive legal advice to be used to advise about compliance.

57.    Overall, this situation is unsustainable if the UK is to maintain its attractiveness as a global financial hub as it signals a lack of commitment to enabling a clear and conducive regulatory framework. This is damaging for the UK’s attractiveness as a destination for investment and risk placement and it is essential that the ongoing regulatory framework review addresses this significant challenge.

Product governance

58.    The FCA’s recent update to the product governance framework in the UK as part of its pricing practices work was designed to address specific harms identified in the retail insurance market, and represents a robust and justifiable response to the issue. However, regulators decided to extend the scope of such rules to products sold to commercial customers for risks that do not fall within the definition of ‘contracts of large risks’.

59.    We understand from our market participants that this created a substantial regulatory burden in respect of servicing a significant contingent of sophisticated commercial customers. Such customers will very often engage insurance brokers to act as their expert agent with respect to the placement of their business and, as such, do not require the same level of regulatory intervention that retail customers or small businesses might. Whilst these requirements arguably did not bring anticipated benefits, the associated compliance burden increases costs which may ultimately be passed on to customers, resulting in a ‘lose-lose’ situation.

60.    The market is concerned that this blanket application of the product governance framework signals poor understanding of how the Lloyd’s and London market operates so that it is easier to bring it within the scope of the requirements rather than consider how the framework can be implemented in a more targeted, and therefore, more proportionate manner. Whilst the FCA considers that ‘the rules give firms enough flexibility in relation to the product governance arrangements they put in place for these products’[11], firms find that there are limited possibilities for steering towards a proportionate application.

Assessing the current stock of regulation

61.    Regulators must consider how to facilitate better understanding of, and consequently compliance with, the regulatory rules among regulated entities through providing a single and consistent source of the relevant legal and regulatory provisions, including on-shored legislation (e.g. Solvency II for insurers), FSMA, FCA/PRA rules, supervisory statements, Dear CEO letters, speeches and other related material. 

62.    In particular, we propose that the FCA and PRA should be mandated to undertake a self-contained one-off exercise to evaluate the totality of their current stock of substantive regulatory material, and consider how to condense it to a rationalised form. Whilst we appreciate that a wholesale review exercise is likely to be resource intensive, we expect the benefits would outweigh the costs over the medium term.

63.    Such a rationalisation process is particularly necessary in relation to conduct rules given that the impending Consumer Duty will add further complexity on top of the layers of existing rules that have developed over time. Although we appreciate the efforts that the FCA has taken to align the requirements of its existing suite of rules with the Consumer Duty, the following example from a sub-set of the existing rules demonstrates the complexity experienced by practitioners.

64.    The Consumer Duty rules state that compliance with PROD 4 continues to be required, but may be relied up on as “tending to establish compliance” with the requirements of the Duty’s ‘product and services outcome’[12] and the ‘price and value outcome’[13]. However, the effect of this is that firms will continue to need to consider two sets of separate requirements and account for them in their compliance frameworks. Compounding this, the draft non-handbook guidance states that “[w]here existing rules require manufacturer and distributor firms to assess whether the price of their products and services provides fair value and to review this regularly, they will comply with the price and value outcome.”[14] This is inconsistent with the language in the rules.

65.    Though these may appear superficially to be minor misalignments, such inconsistencies can cause a real difficulty for firms. While the FCA can rely on its discretion as to how it enforces these rules to achieve a pragmatic and sensible outcome, the regulated firms themselves must incur the cost and time to ensure strict compliance with both sets of rules, to little advantage to anyone. Overall, this example is but one demonstration of the complexity of interpreting (and therefore potentially of complying with) the current suite of regulation.

66.    As an illustration of a wholesale review process in practice, Lloyd’s has recently undertaken an exercise to transition from using rules-based Minimum Standards, to new outcomes-based Principles (discussed in more detail in paragraphs 38 to 40). The 13 Principles, which allow for differentiation according to syndicate materiality, articulate the fundamental responsibilities expected of all managing agents in order to support the market’s overall performance, capital strength, financial and reputational credibility. Our view is that this review process has led us to an outcome which:

• allows more focus on the oversight outcomes we seek to achieve, as opposed to the processes conducted;
• provides a way of differentiating managing agent approaches based on their materiality;  
• allows managing agent senior management to interpret and apply Lloyd’s expectations in the way most appropriate to their business;   
• creates clarity, transparency and efficiency across the market for all participants;
• is resilient to change over time by moving away from prescriptive detail.

Role of insurance in net zero transition

67.    As a key enabler of domestic and international economic activity, the financial services industry is at the forefront of efforts to mitigate the impacts of climate change, whether through reducing and managing the impact of associated natural disasters or providing financial support across multiple industries to build greater climate resilience and increase the scale and speed of the transition. While individual participants can undoubtedly take steps to transition their own businesses to net zero, that process could be accelerated and made more impactful if firms were able to join together to agree common approaches in areas where there is no existing regulation or where current regulation falls short of ambitious climate goals.

68.    In the context of the insurance industry, it is clear to Lloyd’s that competition law as it is currently applied is having a direct impact on the ability of companies in the insurance value chain to move quickly to make their business ‘greener’. Lloyd’s has therefore previously highlighted the need to make positive changes to the current competition law framework that would support the industry’s green transition. Whilst this issue technically falls outside the scope of the current inquiry, we consider competition law restrictions remain a major obstacle in speedy net zero transition and require policymakers’ attention.

International standards and co-operation

69.    As highlighted throughout this submission, the UK financial services market has a strong reputation globally with its renowned infrastructure, robust financial regulation and access to diverse workforce. We welcome therefore the government’s commitment to maintaining highest regulatory and supervisory standards in the UK as this will provide confidence to domestic and international customers, investors and regulators.

70.    The UK’s future success as an attractive destination for international businesses and their customers also depends on the regulators’ ability to keep in step with global trends and developments in the financial services industry and its regulation. The UK regulators therefore need to ensure close co-operation with the community of international policymakers to remain a leading force in shaping global insurance regulation. Vicki Saporta’s position as a Chair of the IAIS Executive Committee demonstrates this strong commitment to the international standard-setting efforts and we welcome the PRA’s active role in the international fora.

71.    We also encourage the regulators to take a more proactive approach in bilateral relationships with other regulators to facilitate the UK firms’ participation in overseas markets. Companies with international footprints have to comply with local regulations which could often be reduced if domestic regulators gained comfort from the UK regulators’ supervisory activities. We recognise that the political will and practical framework for such bilateral recognition of ‘home state’ supervision are often absent at the international level, which makes the process very challenging, but there might be scope for promoting this in the future, particularly as the UK is building its position outside the EU.

Question 4. What is the status of the London Market’s global competitiveness, and how is this impacted by different regulatory approaches in other territories?

72.    The UK has a globally renowned reputation as a financial centre and there is no doubt that it starts from a sound place in the increasingly competitive landscape of financial hubs. The UK enjoys a strong reputation for the rule of law and high levels of confidence in public institutions and processes. The UK financial services market also has an eminent position internationally with its renowned infrastructure, robust financial regulation and access to a diverse and skilled workforce.

73.    However, other markets are quickly catching up because they have dedicated and forward-looking strategies for growing their competitive advantages and becoming a marketplace of choice for investments, business and employment. This dynamic environment is positive news for firms with international ambitions, but it also highlights the importance that governments should attach to continuous alignment with overseas practices and adoption of necessary changes to retain their competitive position. We have already noted the success of the FCA’s Regulatory Sandbox, which has become a blueprint for promoting financial innovation and been adopted in a number of jurisdictions over the recent years. However, we also encourage UK policymakers to consider how to preserve the UK’s competitive position in the future, including looking beyond financial regulation aspects.

74.    As an example, the Monetary Authority of Singapore (MAS) attributes its competitiveness to a wide range of factors beyond aspects purely related to financial regulation:

‘Strong capabilities across wealth and asset management, foreign exchange and derivatives, insurance and risk financing, fixed income, infrastructure finance, as well as FinTech and innovation are underpinned by a pro-business and cost-competitive environment, excellent infrastructure and international connectivity, as well as a highly skilled, cosmopolitan labour force’[15].

75.    According to the MAS, Singapore ranks high on the global competitiveness scale thanks to the quality of its institutions, government efficiency, pro-business environment, developed infrastructure, high speed connectivity, openness to trade as well as progressive digital environment and adoption of new technologies. The above example highlights the need for countries to undertake a holistic approach to building and maintaining their international competitiveness, an undertaking which should incorporate a wide range of factors touching on the ease of establishing a business, accessibility of financial regulation and flexibility of the immigration rules.

Government and industry fora

76.    The industry will also have a significant role to play in supporting the UK regulators’ and the wider Government’s work on promoting the UK’s competitiveness through sharing the relevant expertise and experience. In this context, we believe it could be beneficial to establish a joint forum that brings together the Government, regulators and industry to discuss emerging international trends, risks and opportunities and how they interact with the UK’s competitiveness. This forum would also support the Government in its regular reviews of UK competitiveness as proposed in paragraph 80.

77.    Similar groups exist in other jurisdictions, where industry players – some with extensive international footprints and experience – come together to share their knowledge and develop proposals on enhancing competitiveness of the local jurisdiction. In Singapore, for instance, the Financial Centre Advisory Panel (FCAP) brings together leaders from the banking, insurance and asset management industries to advise the MAS on potential financial sector reforms and strategies for Singapore. FCAP meets quarterly to provide an industry perspective and share expertise on relevant topics to help guide the development of Singapore’s regulatory policy on financial services. The MAS describes the FCAP’s purpose as follows:

FCAP aims to strengthen the dialogue and partnership between the MAS and the financial industry, to drive financial sector growth and the development of Singapore as an international financial centre… FCAP enables the MAS to tap the insights and experience of a distinguished advisory panel, to co-create policies and chart strategies to help grow Singapore as a leading international financial centre[16].

78.    In another example, the Hong Kong Financial Services Development Council (FSDC) was established in 2013 by the Hong Kong Special Administrative Region Government. It acts as a cross-sectoral advisory body to engage the industry in formulating proposals to promote the further development of Hong Kong’s financial services industry and to map out the strategic direction for the development. One of its objectives includes advising ‘the Government on strategies and measures to expand the scope of the financial markets of Hong Kong and enhance the competitiveness of Hong Kong as an international financial centre’ which is delivered through, among other things, working ‘with regulatory and trade bodies to identify new opportunities for, and any constraints on, the sustainable growth and diversity of the financial services industry’[17].

79.    To illustrate the practical application of this approach, Hong Kong implemented specific tax incentives in 2021 in relation to reinsurance business undertaken by direct insurers as well as certain types of general insurance and brokerage business. As a result of the reforms, profit tax rates for in-scope business were halved from 16.5% to 8.25%[18]. The need for tax reform was first promoted by the FSDC and highlighted in its Turning Crisis into Opportunities report[19], which outlined various options for enhancing Hong Kong’s status as Asia’s insurance hub.

Assessing competitiveness

80.    Building on the UK regulators’ implementation of the new objective, the Government should also undertake a regular gap analysis of the UK’s competitiveness by comparing it with other key international financial hubs. We propose this exercise be undertaken every five years as this frequency will allow effective analysis of, and response to, the evolving financial services landscape internationally, without putting too much time pressure on the Government. It should also evaluate the rulemaking, supervisory and market development dimensions of competitiveness and how they can be enhanced in the UK context.

Conclusions

81.    We would reiterate that where we refer to international examples we are not necessarily suggesting that the approaches described be replicated in the UK. They evolved in response to the local and structural needs of the relevant financial markets, which might not be directly relevant in the UK context. This inquiry, however, provides an opportunity to consider how growth and competitiveness considerations can be incorporated in the policymaking and supervisory processes to help the UK to ‘renew’ its position as the world’s pre-eminent financial centre. Successful international examples provide a useful perspective on how to attain this outcome.

Appendix 1 - Lloyd’s business and operations

Overview of the Lloyd’s market

1. Typically, the risks underwritten at Lloyd’s are complex, with large monetary exposures and risk profiles characterised by high severity and low frequency. Although marine, energy and aviation insurance make up a small proportion of Lloyd’s overall business, the Lloyd’s market is an important provider of this type of cover to clients worldwide. A significant portion of Lloyd’s premium income also relates to reinsurance.

2. Lloyd’s underwriters therefore often take on risks that local insurance markets are not well-placed to underwrite, for reasons of size, profile or exceptionality. Those insured at Lloyd’s include private individuals, small and medium-sized companies, large commercial entities and insurance companies. 

3. The Lloyd’s market writes a variety of different types of non-life insurance[20]:

4. This business comes from a wide range of geographies:

5. Lloyd’s market’s capital providers also represent a wide range of profiles and geographies:

Contribution to the UK economy

6. Although Lloyd’s does not have GDP analysis for its own economic activity, the London Market Group (LMG) report, ‘London Matters’[21], estimates the contribution of the London Market to UK GDP in 2018:

7. In 2018, 63% of core London Market premiums were underwritten at Lloyd’s ($47.4bn), 34% by the Company Market ($26.1bn) and 3% by P&I clubs ($2.4bn), emphasising Lloyd’s central role in the London Market.

Employment

8. It is estimated that, in 2018, London Market firms employed 32,000 people in London, and another 15,000 elsewhere in the UK.

The regulation of Lloyd’s

9. Regulation in the UK: The Society of Lloyd’s and Lloyd’s managing agents are dual-regulated under the UK’s regulatory structure. The Prudential Regulation Authority (PRA) regulates them for prudential purposes and the Financial Conduct Authority (FCA) supervises their business conduct. The FCA regulates Lloyd’s members’ agents and UK-based Lloyd’s brokers in totality.

10. International regulation: The Lloyd’s market underwrites insurance and reinsurance risks from around the world in accordance with applicable local laws and regulations. 

11. In most jurisdictions carrying on insurance business is subject to legal licensing or other authorisation requirements. Because Lloyd’s is not an insurance undertaking, its international authorisations need to take account of its structure and legal form. International supervisors are aware that considerable administrative and practical problems would arise if they sought to authorise Lloyd’s members individually.

12. When Lloyd’s obtains a licence outside the UK, it therefore sometimes needs to negotiate specific legal provisions to permit the local supervisory authority to licence or authorise Lloyd’s underwriters to carry on insurance business. Its international authorisations can summarised as follows:

* EEA authorisations are held by Lloyd’s Insurance Company (Lloyd’s Europe) based in Brussels.

** Includes British Overseas Territories, Self-governing Territories and Crown Dependencies.

Lloyd’s Europe

13. To mitigate damage from Brexit to Lloyd’s trading position, it established a 100% owned subsidiary in Belgium – Lloyd’s Europe. Lloyd’s is a Solvency II compliant (re)insurer which is authorised and regulated by the National Bank of Belgium and supervised by the Financial Services and Markets Authority. Lloyd’s Europe reinsures 100% of all risks to Lloyd’s syndicates.

14. This arrangement allows the Lloyd’s market to continue to access EEA insurance and reinsurance markets after Brexit, as Lloyd’s Europe passports into other EEA member states. Lloyd’s Europe does not write non-EEA risks (though it does have a licence in Monaco). Reinsurance continues to be written by Lloyd’s underwriters in London wherever possible.

11 February 2022

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