In the UK, the most prominent issue that will affect the insurance market over the course of the coming year is, of course, Brexit. Following the triggering of Article 50 in March 2017, the UK has entered a period of uncertainty. Following the recent election and the conservative minority government, the proposals for a “hard” Brexit have been thrown into doubt.
In her Brexit speech on January 17, 2017, Prime Minister Theresa May stated that the UK will work to negotiate a bespoke Free Trade Agreement (FTA) with the EU, emphasizing that the FTA should be concluded by the end of the two year period contained in Article 50. Such a deadline is unprecedented in trade negotiations and meeting it will be challenging to say the least; any FTA will need to be agreed by all of the European Parliament and possibly by all Member States, not all of whom will have aligned interests.
Moreover, the Prime Minister also stated that her proposals for Brexit “cannot mean membership of the single market” which would mean that the UK could not use the EU “passport” to allow financial services companies to continue to sell their services throughout the bloc. An alternative option would be to establish a regulatory equivalence framework; however this would require further negotiation followed by a legal act by the European Commission and equivalence is not necessarily always available – it is limited under Solvency II and non-existent under the Insurance Distribution Directive (IDD).
In addition the UK will need to negotiate FTAs with non-European countries. To do this, the UK would need to retake its full membership in the World Trade Organisation (WTO) and present its own schedule of tariffs and commitments. This might by itself bring specific challenges should any other WTO members raise any concerns.
The Prime Minister has said that countries such as China, Brazil and the Gulf States have already expressed interest in negotiating FTAs with the UK, and that the UK has already started conversations with Australia, New Zealand and India. Nevertheless, concluding FTA negotiations with these states would likely still prove to be challenging as those countries would have to wait for the conclusion of a UK-EU agreement before agreeing to any bilateral deal. Moreover, there are political and legal constraints on the UK negotiating those agreements before exiting the EU.
The Prime Minister’s planned approach – a clean exit from the Single Market and Customs Union – looks far less likely to be the outcome of Brexit after the recent elections with public support for “hard” Brexit limited.
The UK government’s plans to promote London as an insurance linked securities (ILS) hub will continue to be an area of growth in 2017. The outcomes of a number of consultations are anticipated over the course of the year. Once a fit-for-purpose framework has been created, the UK can participate in the growing market for ILS or alternative reinsurance capital which currently stands at around US$70 billion. It is estimated that the ILS market could grow to US$87 billion by 2019.
London, with its global insurance and capital market expertise, would be well placed to contribute to the continued growth and development of ILS business. However, the UK is not alone in seeking to capture ILS business; jurisdictions such as the Cayman Islands, Gibraltar, Guernsey and Bermuda all have established, competitive regimes. Coupled with the current uncertainty surrounding Brexit, it is important that whatever final rules are produced create the necessary incentives to attract investors and provide the robust regulatory framework to place London as the market leader for alternative risk transfer.