Great Brexit insurance migration shifts $75 billion from London
(Bloomberg) -- London’s outsized role in the global insurance industry is being whittled down by Brexit.
As much as 61 billion pounds ($75 billion) of business is shifting to rival financial centers in the European Union as a consequence of Britain’s vote to leave the bloc. And it’s happening regardless of the divorce terms.
The EU’s insurance and pensions regulator has ordered every U.K.-based underwriter to transfer policies held by European clients to units on the continent. While the bulk of those total liabilities -- the potential payout of all the policies, an industry gauge of scale -- has moved or is moving to Belgium, Luxembourg, Ireland and elsewhere, about 5 billion pounds will still be in Britain if Brexit happens Oct. 31, according to the Bank of England’s Financial Stability Report in July.
Lloyd’s of London, the world’s biggest insurance market, stands out as a laggard: About 3 billion pounds is in policies written there over the 25 years before it opened a Brussels subsidiary at the beginning of 2019. If Britain leaves the EU without a comprehensive agreement, Lloyd’s wouldn’t be able to guarantee that it could legally pay claims on those European policies. The institution says they will all be transferred to the continent by Oct. 31, 2020.
A Lloyd’s spokeswoman said EU member states have measures in place to ensure that 90% of the policies can pay out even after a disorderly Brexit. And Lloyd’s has told its syndicates -- the insurers that underwrite policies on its trading floor -- to honor all claims for continental clients following a no-deal divorce.
The longer-term impact of the shift will be both practical and symbolic, and it matters because London still accounts for as much as one-tenth of the world’s insurance and reinsurance market. Brexit has been chipping away at that role, and the decline could steepen.
A chaotic departure from the EU is looking more likely after Prime Minister Boris Johnson asked Queen Elizabeth II to suspend Parliament until mid-October, making it harder for opposition politicians to block a no-deal Brexit. That prospect has convulsed the pound: The currency has weakened more than 8% against the dollar since its mid-March peak, when an accommodation with the EU seemed more likely.
Most U.K. insurance companies moved their European business to EU countries earlier this year, ready for the original March 29 Brexit date. Admiral Group Plc, for example, chose Madrid: Chief Financial Officer Geraint Jones said the firm spent 4 million to 5 million pounds transferring policies into a new unit there.
Insurance companies that have yet to move their European business from the U.K. need explicit permission from authorities in each of the 27 other EU countries to service clients there. Absent those approvals, the insurers can’t legally pay claims or provide other services.
A spokeswoman for the European Insurance and Occupational Pensions Authority said the regulator would provide a country-by-country update soon.
Costs and pitfalls are likely down the road. National regulators won’t allow insurers to use their European subsidiaries merely as letterboxes; those offices will need to be staffed and run as substantial operations.
“There’s a tension, because a lot of the expertise in writing that business still resides in London,” Hilary Evenett, a partner at Clifford Chance LLP, said in a telephone interview. “Over the years, you can also anticipate that other countries are going to develop that expertise locally.” In the future, she said, “it’s not certain how much expertise will be here and how much will be on the continent.”
The U.K. also faces a loss of tax revenue: The government collects an insurance premium tax on every policy. Following Brexit, that revenue will go to EU countries.
As with so much to do with Brexit, uncertainty is unnerving.
“There’s a huge amount of expertise and infrastructure around the London market which one might expect to diminish in relative importance over time, but London should still remain the pre-eminent center for insurance for the time being,” Duncan Barber, a partner at Linklaters LLP, said in a phone interview.