As the reinsurance market heads to Monte Carlo for the 2017 Rendezvous de Septembre, Stephen Netherway reviews where we are with the Brexit position and how this may play out for the market.
Since the Brexit referendum, the UK’s financial services sector has moved relatively quickly to close out the risks to its business and clients. In stark contrast there has been little, if any, progress (despite much debate) in clarifying what will happen to the European Union legal structure in which UK financial institutions and FS regulation currently operate.
UK regulators have required firms to be ready for Brexit but cannot offer any guidance on what Brexit means or its timetable, so the worst case scenario (of a crash landing in late March 2019) has been the only basis for firms to model. Key restructuring often involves getting single market operating subsidiaries established, and applying for authorisation, in a continuing EU/EEA state and/or transferring operations to existing EU/EEA subsidiaries.
The benefits of a ‘smooth’ transition - or at least some reasonable prior notice of regulatory change - are widely acknowledged. The European Council’s negotiating mandate recognises the desirability of transitional arrangements (assuming Article 50 withdrawal terms can be agreed). The UK will ‘port across’ the EU rules into domestic requirements, and so could seek the continuance of current cross-border arrangements, but Article 50 requires some level of consensus on the ultimate EU/UK relationship, which is to be negotiated.
The principal problem for business, including the insurance and reinsurance markets, is that predicting the permissive business world after March 2019 is uncertain, but duties to shareholders to ensure seamless trading and consequent shareholder value must be performed. Budgets and business planning for 2019 must happen now. A no deal outcome and reliance on WTO rules does not really cut it for financial services, including the (re)insurance market. The WTO initially had great success in relation to trade in goods. In services, it has made more limited progress, and progress in FS has been difficult. This means that ‘market access’ (in WTO/FTA terminology) is not the real or immediate priority for financial services. An agreement on dual regulation co-ordination (“DRC”) – let us call it voluntary equivalence – may be the golden bridge that allows an acceptable element of business as usual.
The current single market package of DRC is the start point and could continue through a transitional period. In the longer term the objective would be to maintain and coordinate DRC arrangements on a bilateral basis ( but note most free trade agreements (“FTAs”) are about convergence and reducing barriers; Brexit involves the opposite - managing potential divergence and DRC barriers).
For reinsurers, as opposed to brokers, there is already in the EU regulatory regime a recognition that third country reinsurers and markets (which the UK would become after Brexit) can achieve equivalence for purposes of group supervision and solvency, if necessary through a recognised transition phase: this is the means by which markets in Australia, USA, Japan, Brazil, Canada and Mexico are ultimately able to interact with the EU markets. DRC/voluntary harmonisation echoes a recognised approach already that would be helpful for solving post Brexit dealings by carriers retaining a central base in the UK.
The point remains that cementing the proof for permitted future dealing very close to the Brexit countdown will be far too late -the clock is ticking now to decide and begin implementing the business decisions taken whether to relocate business into other EU countries. For some it has ticked down and the clock has stopped: the probable loss of passporting rights as matters stand after Brexit has sent companies headquartered in the UK to look now for alternative homes -with for example AIG, RSA and Hiscox choosing Luxembourg, while Lloyd’s and QBE have opted for Brussels - to allow continued business operations within the single market, whatever the outcome of Brexit.
It rather looks that the reinsurance market will have its contingent affairs well in order long before we have any idea what the future really will hold post Brexit and within (or without) any possible transition period.