A UK exit from the European Union will create a “rarely experienced” level of uncertainty for Lloyd’s, the London market as well as the UK and other European economies, according to Sean McGovern, Lloyd’s chief risk officer and general counsel.
McGovern discussed the implications of a possible UK exit from the EU – or “Brexit” – on the London insurance market and Lloyd’s during a speech this week at the Insurance Institute of London. A referendum to vote on Brexit could be held as early as June.
He predicted that a vote to leave the EU “will create very real risks and uncertainties that we must be prepared for.”
The UK’s membership of the EU has been part of the success story of the London market, which currently is the “largest global hub for commercial and specialty risk,” he said, noting that it controls more than £60 billion ($86.1 billion) of gross written premium.
“It is a diverse market made of up over 350 firms contributing over 20 percent of the city’s GDP and employing 48,000,” he explained.
McGovern said that continued EU membership “will be key to our future growth and development as we deal with competition from other insurance centers around the world.”
He discussed the benefits of EU membership, which EU confers three important benefits for Lloyd’s and the London market:
“These benefits are, in my view, critical to the success of the London insurance market and its position as the world’s largest specialist insurance and reinsurance center,” he said.
The most important of these benefits is the single market, which benefits the whole London market as well as Lloyd’s, he stressed, adding, however, that “we take the existence of the European single market for granted.”
He let the numbers demonstrate the power of the EU’s single market. With more than 500 million people, the EU is the world’s largest insurance market with a market share of “nearly 33 percent and total insurance premiums of nearly 1.4 trillion euros [$1.6 trillion],” he said.
“Access to this huge insurance market on London’s doorstep is clearly a matter of some significance to the London insurance market. We would conservatively estimate that the London insurance market writes £6 billion [$8.6 billion] of premium income from the EU,” McGovern noted.
The single insurance market and its passport system allows UK-based companies to establish branches in other member states and still be regulated solely in the UK, he indicated.
The advantage of this system is that underwriters “are not required to localize any funds in other EU jurisdictions to meet liabilities,” nor do they have to make local financial reports to other EU supervisors under EU law.
“Lloyd’s underwriters are able to write insurance and reinsurance from all of the other 27 member states on a cross-border basis and also locally in those countries in which we have branches.”
Therefore, he emphasized, the EU single market allows for “efficient deployment of capital…”
“Overall this model is, in many ways, the optimal international regulatory regime for Lloyd’s and other London market firms,” he added. “Indeed, we wish that countries outside of the EU placed the same degree of reliance on our home state prudential supervision as EU member states are required to do.”
The benefits of the single market are also important for non-Lloyd’s companies. He pointed to the membership of the International Underwriting Association, which is the organization that represents non-Lloyd’s international and wholesale re/insurance companies operating in the London market.
Of the IUA’s 50 members, McGovern said, just four are UK entities. “Twelve are branches of EU insurers, 35 are subsidiaries of groups headquartered in third countries and nine are branches of third-country insurers.”
He said the single insurance market also benefits brokers because they can “operate throughout the EU on the basis of home state passports and exclusive home state prudential supervision.”
In short, the single market is vital to London’s ability to service its global client, McGovern affirmed.
Ramifications of Brexit
McGovern explained that Brexit would mean “a period of considerable uncertainty” for the UK, citing the example of Greenland, which voted to leave the EU in 1979, because of a single issue: fishing rights.
“Negotiations on that single issue dragged on for six years before agreement was reached, and Greenland left the EU in 1985,” he said.
“I venture to suggest that the UK and the EU would have a rather larger number of very significant economic and other questions to resolve in the course of any withdrawal process. This makes the timing of an eventual exit impossible to predict,” McGovern said.
He warned that a vote to leave would fuel European financial markets turmoil and possibly create turbulence in global financial markets.
“Uncertainty around the timescale of the negotiations between the UK Government and the EU would put Britain in a limbo, making it less attractive to foreign investors.”
McGovern said he is leading a team that is developing contingency plans to deal with a range of possible scenarios should Brexit occur.
The objective is “to ensure that Lloyd’s can continue to provide our market with access to the EU,” he said. “While there will be more work to do in the event of a vote to leave, we are confident that this objective can be achieved and that we will be able to provide ways to allow business to continue to be written on both a cross-border and a branch basis.”
For those companies that use the Lloyd’s platform to access European markets, McGovern said he was confident that “we will be able to find a way through the uncertainty.”
“This will allow business to continue to flow to London but will also continue to offer the opportunity to write business in local markets under the Lloyd’s structure. But we should not kid ourselves – the London market’s access to the EU will not be as good as the access we currently enjoy.”