Written evidence submitted by the London Market Group (SOL0022)
1.1 The London Insurance Market leads the world in providing specialty commercial insurance and reinsurance, taking on the most difficult and complicated risks.
1.2 The London Market Group (LMG) represents the four key market constituents - the International Underwriting Association of London (IUA), Lloyd’s of London, the Lloyd’s Market Association (LMA) and the London & International Insurance Brokers’ Association (LIIBA). These bodies in turn represent companies that generate over 20% of the City of London’s total income, employing 48,000 people and controlling over £60 billion of gross written premium.
1.3 The LMG is the only body which speaks collectively for all practitioners in this significant Market, representing the views of firms operating within Lloyd’s, insurance brokers and licensed firms of reinsurers and insurers operating outside of the Lloyd’s market – reflecting the full extent of the Market.
2.1 In consultation with our member associations there is a general perspective that Solvency II’s fundamental principles are sound.
2.2 Solvency II is a risk-based regulatory system which the UK was instrumental in developing. This new European approach was based on the UK’s regulatory regime. It has only been in place for 10 months and still needs time to bed down, but our members consider that the London Market has benefited from the greater level of regulatory harmonisation across the EU that Solvency II provides.
2.3 Given the importance of our future relationship with EU markets and the potential costs of implementing a revised regime, our members believe that Solvency II should continue to be the basis of UK insurance regulation.
2.4 This is due to two major issues:
3.1 The need for regulatory equivalence
3.1.1 In any possible post-Brexit scenario, it is important that our regulatory regime under Solvency II is deemed by the European Commission to be equivalent with that applied in EU member states.
3.1.2 While equivalence under Solvency II does not give single market access rights and is not an alternative to passporting, it would mean that UK based reinsurers would be treated in the same manner as reinsurers inside the EU.
3.1.3 The key consideration is that London Market insurers wish to retain the ability to carry on business in the EU from London once the UK has left the EU. This would require the UK to negotiate arrangements similar to the existing passporting rights.
3.1.4 We believe that this would require the UK to retain a similar insurance regulatory regime to that in the EU. If the UK moves away from Solvency II, this would make it more difficult for the UK to obtain the EU’s agreement to an arrangement permitting UK insurers access to EU insurance markets.
3.1.5 Solvency II will also permit EU supervisors to continue to rely on the supervision of UK insurance groups by the Prudential Regulation Authority (PRA), should they establish subsidiaries in the EU.
3.1.6 Aligned to regulatory equivalence the LMG would wish to see the following issues prioritised in the negotiations.
3.1.7 Retention of passporting rights: The Government should seek to retain passporting rights for UK insurance businesses in the EU, and for EU insurance businesses in the UK. The LMG believes that over £7.8 billion of gross London Market revenue originates in EU member states. Much of this could be at risk if passporting rights are lost.
3.1.8 Keeping existing passporting rights will help to retain London’s status as the global hub for financial services. Passporting has contributed to London remaining the global centre for insurance and reinsurance. Importantly the reciprocal rights that EU customers enjoy means that they can easily do business in the UK.
3.1.9 If passporting is lost, London market firms currently using passporting to carry on business in other EU member states will need to establish operations in the EU. EU businesses trading in London through their branches, and currently using passporting rights will have to create new UK entities. If they do not do this, they risk losing considerable business.
3.1.10 Securing transitional arrangements: The Government should secure an agreement on transitional arrangements for financial services before a new trading agreement with the EU is negotiated. These are crucial to preserve financial stability and to ensure continued access to financial services until a final deal is reached. When the Government triggers Article 50, EU customers of UK insurers must decide whether to renew their policies (typically renewed annually). Uncertainty over the imminent change in the status of their UK insurers will be an important factor in these decisions.
3.1.11 Many UK companies are already considering the relocation of part of their business to the EU. Greater certainty – through transitional arrangements – would remove the need for UK businesses to reorganise before they know the new relationship.
3.1.12 The LMG is asking the Government to consider the following transitional arrangements:
3.1.13 Importantly, as part of the negotiations the UK Government could agree that all EU and EEA states have reciprocal rights on this basis in the UK. The need for this is clear – recent analysis from LMG member the International Underwriters Association (IUA) shows that of premium currently written in London, £7.3 billion will potentially be directly affected by a change in rules governing UK participation in the EU single market and its financial services passporting regime.
3.1.14 Of this, £6 billion is international business written in London by firms with a parent company or principle European base located elsewhere in the EU. This demonstrates the number of firms which rely on London’s existing access to the single market to freely write significant business covering clients and risk across continental Europe, and underlines the need for reciprocal arrangements.
3.2 WTO Rules
3.2.1 It is also important that the Government reject a new relationship based solely on World Trade Organisation (WTO) Rules. These do not provide a solution for the London Insurance Market as under WTO Rules UK insurance and reinsurance companies would have only limited access to markets in EU countries.
3.2.2 Under WTO Rules the industry would be forced either to set up separate branches or subsidiaries in each EU member state, or to select an EU state and utilise passporting from there to the other EEA states. This latter option provides a medium term threat to the clustering of expertise within London that currently gives the UK a considerable competitive advantage.
• Each branch or subsidiary would be subject to local regulation and governance rules in each and every EU state.
• It undermines London’s successful model of centralisation of capital and expertise, disbursing both across the EU.
• Given these requirements it is expected that many entities in London would no longer do business in certain EU states.
4.1 Solvency II helps to promote a number of the strengths of the London Market 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.
4.2 It has also been influential in the development of international regulation. Two of the UK’s major commercial insurance competitors – Bermuda and Switzerland – are already Solvency II equivalent.
4.3 It is our understanding that other countries – where the UK is seeking greater market access - such as the USA, China and Canada are also exploring equivalency status.
5.1 Regulation is a key factor for our customers in deciding where to place capital investment. It is vital that regulation remains proportionate and does not put London at a disadvantage.
5.2 Our competitors in Singapore, Qatar, Dubai and Bermuda – which has full Solvency II equivalence - have regulators with statutory duties to actively support the promotion of their local insurance markets. The FCA and PRA do not have such objectives and do not even have to have regard to the impact of their actions on the competitiveness of the financial services sector.
5.3 The LMG would like the Government to consider giving the PRA and FCA a balancing statutory objective to consider the international competitiveness of the UK financial markets and consider a dedicated inward investment unit in the PRA to support and encourage new entrants to the UK.
5.4 Solvency II only applies to insurance companies. The brokers that the LMG represents - who are responsible for bringing almost all of the business to the Market - are governed by the Insurance Mediation Directive (IMD). They will also be subject to the upcoming Insurance Distribution Directive (IDD). Specifically, brokers make widespread use of passporting arrangements under IMD. We would be happy to discuss our thoughts on these two regulations with the Select Committee at the appropriate time
November 2016