The UK’s exit from the European Union, or “Brexit,” could lead to a loss of business for Lloyd’s of London unless the UK government is able to negotiate passporting arrangements to maintain access to the European Economic Area (EEA)*, according to a report published by Fitch.
Without passporting rights, UK insurers wishing to underwrite risks from the EEA would need to set up entities in the EEA, which could lead to business moving away from the Lloyd’s platform, Fitch affirmed in its “London Market Dashboard – 1H16 Results.”
In 2015 the EEA accounted for £2.9 billion ($3.7 billion) or 11 percent of Lloyd’s gross written premium.
The Fitch dashboard also covered the following topics:
- Premium rates. In H1 2016, premium rates for London market insurers continued to fall, particularly for marine and energy and for property lines, Fitch said. “Some insurers have attempted to mitigate this by diversifying into specialty lines, where rates have held up better, but we believe this could lead to price falls in these lines as well.”
- Reserve releases.Reserve releases continue to support earnings for London market insurers. Fitch pointed to the example of Hiscox, which reported strong reserve releases that reduced its combined ratio by 13 percentage points in H1 2016 (H1 2015: 17ppts).
- Catastrophe losses.While there was a slight uptick in catastrophe losses in H1 2016, aggregated catastrophe losses were within London market insurers’ budgets, said Fitch’s dashboard.
- Investment returns.London market companies reported slightly improved investment returns in H1 2016 compared with H1 2015, driven by gains on fixed-income investments as yields declined, particularly following the outcome in the referendum on EU membership. “However, we do not expect such gains to contribute to returns on an ongoing basis, and we expect low yields to be a drag on profitability.”
- Capitalization.The majority of London market insurers hold strong levels of risk-adjusted capital supported by retained earnings and conservative investment portfolios, Fitch said. “Most London market insurers have not yet published their Solvency II coverage ratios but we expect all major players to maintain strong ratios.”
* As an economic and political union of 28 countries, the European Union operates as a single market, which allows free movement of goods, capital, services and people among member states. The European Economic Area (EEA), includes 28 EU countries as well as Iceland, Liechtenstein and Norway, which are also part of the EU’s single market. Switzerland is not a member of the EU or the EEA, but became part of the single market as a result of bilateral agreements.