Lloyd’s of London Chairman Bruce Carnegie-Brown has warned that it would be “extraordinary but perhaps not entirely surprising” for the UK to lose reinsurance regulatory equivalence with the European Union (EU) after Brexit.
Addressing the EU Financial Affairs Sub-Committee today, Carnegie Brown said that a loss of equivalence could pose a medium-term disadvantage to Lloyd’s.
The Lloyd’s Chairman noted that an equivalence regime would underpin the free movement of capital across borders, which tends to be substantial for reinsurance business in particular due to the larger ticket items involved.
“The cross-border nature of that is incredibly important to the economics,” he told the Sub-Committee. “We are effectively collecting lots of premiums from different places but we move capital to a point of need when there’s a claim under a reinsurance policy.”
Carnergie-Brown added that free capital movement was also essential for a large wholesale market like Lloyd’s given that its largest line of business is natural catastrophe insurance, which deals with extremely large claims.
“Now, some of the individual states within the EU permit this reinsurance to happen anyway, so it is not a binary issue for us in terms of its long-term impact,” he explained. “But of course, those individual states themselves could change their positions subsequently.”
Contrary to the concerns of some in the market, Lloyd’s is not of the view that reinsurance equivalence with the EU would require any kind of surrender to rule-taking.
For example, Carnegie-Brown pointed to the existing reinsurance equivalence rules that are in place for Switzerland and Bermuda, which are the second and third largest international wholesale re/insurance markets outside of London.
The fact that these jurisdictions were able to achieve such close regulatory alignment with the EU suggests that gaining reinsurance equivalence should not be an issue for the UK, but Carnegie-Brown warned that it was still a possibility.
In preparation for Brexit, Lloyd’s set up a Brussels subsidiary to ensure its business in Europe remained uninterrupted by the regulatory uncertainties surrounding the UK’s departure for the EU.
In addition to the business which has now been transferred over to this branch, Carnegie-Brown said that around 50 jobs have been moved to Lloyd’s Brussels so far.
Building on his earlier points, the Chairman explained that equivalence would remain an important issue for Lloyd’s, but that it would also be looking at different business models to manage its business in Europe.
“I think equivalence without some stability in terms of notice periods and abilities to change our minds on these things, would be pretty much valueless,” he said.
“I think this needs to be in place quite a bit before year-end because otherwise we are all going to have to lean on other contingency buttons to try to avoid losing our reinsurance business from the Continent of Europe.”
Carnegie-Brown’s comments come ahead of the release of the first update to Lloyd’s Blueprint One strategy, which it has said will be narrowed in focus to prioritise just three key targets in 2020.