As Britain prepares to release the final Article 50 trigger to kick-off EU exit negotiations and the City of London braces for the anticipated knock-on blow, London School of Economics (LSE), Financial Markets Group director, Simeon Djankov, has set ensuing annual reinsurance revenue loss estimates at £4 billion.
London’s finance sector could be hit with an £18 billion annual revenue loss.
For the reinsurance sector, which represents 20% of the City’s annual revenues, this could translate into a £4 billion loss from European markets, Djankov stated in a recent report.
But reinsurers are expected to be only marginally affected, compared to their financial sector counterparts, due to already operating largely out of localised subsidiaries; “The majority of insurance services provided in other EU countries are – already delivered via subsidiaries rather than via branches requiring passport, so the United Kingdom’s EU departure would result in few increased costs,” Djankov wrote.
A significant 600 insurers and reinsurers operate in the City of London, employing about 325,000 people and adding £41 billion out of the City’s £200 billion annual revenues – making re/insurance one of the City’s most important sectors, contributing nearly a quarter of revenue and 30% of employment.
An estimated £4 billion out of the London re/insurance sector’s £41 billion total annual revenue is brought in from the European Union.
Although most of City of London re/insurance services delivered throughout the EU already operate through subsidiaries, Djankov said Lloyd’s of London is the ‘exception’ that could be more heavily impacted, as under current regulations Lloyd’s London underwriters have been able to service EU clients.
However, Lloyd’s has proactively responded to the challenges ahead, being among the quickest to make moves to protect its market share – its announced plans to finalise a decision to move its European-service base to either Belgium or Luxembourg by the end of the month.
At least ten other re/insurers have announced similar relocation plans.
According to Djankov’s report, Lloyd’s of London accounts for “11 percent of the market’s gross written premium—£2.9 billion and possibly as little as £800 million directly reliant on passporting.”
The City of London has beneffitted from current EU rules, under which insurer’s using the passport system have been able to hold deposits or trust funds in a single base, rather than have them distributed throughout European states they operate in – one of the many rules that could soon be thrown up into the air as Britain negotiates a new position for EU business transactions.
Djankov added; “The main regulation through which the passport is operated is Solvency II, which covers all types of insurance, from life through maritime.
“Under Solvency II both the equivalence and passport-like rights for third countries could be available for reinsurance, but not for insurers. Again, the ability to operate through existing subsidiaries in other EU countries substantially reduces the risk from Brexit for City-based insurers.”
According to Djankov’s forecast, it appears the City of London’s re/insurance sector won’t be rocked by Brexit waves, but implications for London’s wider finance service sector are more severe; “According to these estimates, for the City of London the direct negative effect of Brexit on the financial sector will be a 12–18 percent loss of revenue and a 7–8 percent drop in employment, clearly significant effects,” said Djankov.
For the British economy as a whole, however, the ripple down effects from the finance sector’s Brexit impact come to a less drastic GDP loss of 0.5% and a 0.2% employment loss.