Brexit has created great uncertainty for the UK, the European Union and perhaps the world. Pretty much everyone agrees on that. But there is less agreement about how an EU exit will affect London’s financial center.
Some are very gloomy about prospects for the market, while others think the re/insurance sector will have an easier time than the London banking sector.
The re/insurance industry in London has “quite a good chance of maintaining dominance” because of the unique services it provides, said Kurt Karl, chief economist, Swiss Re, who spoke at an FT Live meeting this week, titled “FT Future of Insurance: Regulation, Longevity and Digital Revolution.”
On the other hand, he was less sanguine about the banking industry, which he thought would see its position diminished over the coming years.
There’s nothing unique about what goes on in the London banking sector, although it has become very efficient at what it does, he affirmed.
The EU will make sure that the efficiency of UK banks is eroded over time with taxes and regulations, Karl predicted. “That’s my best guess, but it takes a long time to set those things up and a long time to erode such a large financial center.”
Some would call this “vindictive,” but Karl emphasized that it’s in the EU’s self-interest to create a post-exit environment that would “block out as much as they can of the London banking sector.”
Karl explained that the EU is basically a trade block with free trade for members but it is protectionist block for those that operate outside of it—such as the UK after Brexit occurs.
Keep Calm and Carry On
On the day after the June 23 Brexit vote, Vibhu Sharma, CEO UK General Insurance, Zurich Insurance, recalled he walked past the Bank of England where people were clustered, expressing disbelief and panic.
But he and his team decided to take a different attitude. At a meeting that day, they calmly and quickly acted to reassure their stakeholders—customers and employees. For the short-term, Sharma affirmed, nothing really has changed and to some degree “it’s business as usual.” (On July 1, Zurich announced that Sharma is leaving the company to pursue other opportunities.)
However, the UK insurance industry constantly needs to look at creating “a competitive advantage” through various policies, regulations, taxes and talent to enhance its position as the “global source for insurance, as it has been for over 300 years.” he said in emailed comments after the meeting.
Sharma acknowledged, however, there are challenges ahead—and potentially tough negotiations (once the UK triggers Article 50 of the Lisbon Treaty, which starts the ball rolling for an exit from the EU).
One topic—out of many for EU and UK negotiators—will be the regulation of the financial services industry. Karl predicted that the UK will probably be permitted regulatory equivalence once EU exit occurs, primarily because insurers are already compliant with Solvency II.
Sharma laughed when he reminded the audience that the United States did its own kind of Brexit several hundred years ago when it became independent of Britain – and everything seemed to work out okay.
Thomas Dawson, a New York-based partner in Transatlantic law firm Drinker Biddle, also believes that the London insurance market will remain strong because it is a center of innovation, with entrenched support services that are “deep and broad” and “difficult to replicate” in other cities.
There is no greater center of people and expertise, he said in an interview with Insurance Journal.
“It is an international business, a worldwide business. The availability of the single passport is helpful, certainly, but the business will follow the capital and the underwriting expertise,” Dawson said. (Members of the EU are permitted to do business across all 28 countries and only have to be regulated once.)
But Karl explained that access to the European market will not disappear even after Brexit. As an example, he said, Switzerland has an office in Luxembourg, which permits it to be embedded in the EU. “You only need to be in one country to be in the EU.”
Dawson admitted that some commodity business could drift over to the Continent. “However, specialized business … really needs people who know what the heck they’re doing; I think it’s stickier, and I predict that business will probably stay in London.”
Karl went on to say that a lot of the contracts are under British law contracts because of the stability of contract law, which is another strength of the market.
The London market after Brexit also may find that commercial innovation with respect to traditional products, insurance linked securities (ILS) and the use of blockchain technology would be free to proceed “without having to conform to EU-wide norms,” Dawson continued. (The UK government is supporting the development of distributed ledger technology, or blockchain, which it describes as “digital tools for building trust in data”).
“It seems to me London is a place where, with governmental support, you might find enough really smart people to say, we’re going to revolutionize reinsurance transactions with this new technology,” Dawson emphasized.
*This story appeared previously in our sister publication Insurance Journal.