The day after Prime Minister Theresa May triggered Article 50 to begin the Brexit process, Lloyd’s of London confirmed its plans to open a new European insurance subsidiary in Brussels.
Whilst Lloyd’s already has a number of offices in the EU and the European Economic Area (EEA) states, and indeed globally, the move to open a subsidiary in Brussels may indicate a shift of focus from the UK following Brexit. This article considers the position.
In the wake of the UK’s decision to leave the EU, UK-based insurers reliant on the EU passporting regime risk losing continued access to the single market. Business within the EEA in 2015 accounted for £2.93 billion or 11% of Lloyd’s Gross Written Premium. Lloyd’s Chief Executive, Inga Beale, expects that around half of that premium could be lost from London post-Brexit and is, therefore, seeking to mitigate that risk by ensuring European access is maintained.
The critical issue is passporting. The EU ‘passport’ allows financial services firms authorised by regulators in the UK (irrespective of their origin) the ability to offer services remotely across all 28 Member States in the EU. This potentially offers insurers access to over 500 million customers. There is no certainty that the passport will remain once the UK leaves the EU.
The purpose of Lloyd’s proposed Brussel’s subsidiary is to enable Lloyd’s — subject to regulatory approval by the Belgian National Bank — to write business in the EU from there for 1 January 2019 renewal season, whatever the outcome of the Brexit negotiations.
Lloyd’s considered other locations, including Luxembourg, Dublin, Malta, Paris and Frankfurt. With Germany being the home of the largest European insurance market, the choice of Brussels may surprise some. It was driven by the skills, bandwidth and the robust reputation of the Belgian insurance regulator, together with Brussels’ accessibility, local talent and high English-speaking fluency.
The selection may provide some succour to the UK. The risk of consolidating the existing market with a move to Frankfurt might have posed a more significant risk to London’s status, whereas Inga Beale has indicated that she does not expect Brussels to become a specialist centre for insurance.
Further comfort has come from Lloyd’s confirmation that it will keep its headquarters in London.
An exodus from the UK?
Whilst Lloyd’s has some 600 staff in London, it is understood that the initial Brussels workforce will perhaps total 10-20 employees, with support coming from Lloyd’s 60 or so employees presently based at its other European offices. Only the “odd job” is expected to move from London, according to Inga Beale.
Lloyd’s is not alone in making such plans. A number of insurers have indicated that, in response to the risk of losing passporting rights, they may move operations to mainland Europe. Indeed, according to a recent survey by consultancy firm Moore Stephens, more than one third of London market insurers and brokers are planning to establish operations in another European jurisdiction because of Brexit. The most popular locations were Ireland, Germany and Luxembourg - Luxembourg, for example, having been selected by AIG for its new EU subsidiary.
Yet the potential continental drift may not be a one-way street. European insurers and reinsurers are doubtless considering what sort of UK presence they might require for continued access to markets there. Until the renewed uncertainty about Scotland’s future in the UK and the EU is resolved, it would appear to be an unattractive proposition as a base, despite the significant amount of life insurance presently handled there.
Domestic regulatory developments
Notwithstanding its Brussels-based contingency plan, Lloyd’s continues to lobby the UK government to maintain passporting rights. For those firms who will be impacted negatively by the loss of the passport, discussions will continue about passport access being effectively replaced under the EU’s own Equivalence regime in 2018. The Financial Conduct Authority has also confirmed in its 2017/2018 Business Plan that it will focus on ensuring a smooth transfer of EU rules and legislation into the domestic UK framework.
Maintaining passporting rights (or something similar) is likely to prove a difficult balancing act for the UK government. The EU may require the UK to make financial contributions in exchange (as other non-EU, EEA countries such as Norway currently make) and/or to permit the free movement of EU workers within the UK. Each are controversial issues in their own right.
Nevertheless, while the overall impact on the UK therefore remains to be seen, the draw of London is likely to remain strong. London will be difficult to dislodge as Europe’s leading financial centre.