As plans for mutual market recognition are thrown off the negotiating table, the market now has to make the most out of “enhanced equivalence”, a term not so easily defined by brokers
The publication of the UK government’s Brexit whitepaper in July officially dashed any hopes the industry could look forward to mutual market access with its EU counterparts after the divorce.
After the whitepaper was released, outgoing Lloyd’s CEO Inga Beale said businesses must now act on the basis there is going to be no agreement that preserves market access. Or at least, not as the industry currently knows it.
A number of insurers and London market firms have been pursuing a “reverse passporting” strategy, establishing fully-licensed subsidiaries in an EU member state, mostly favouring Belgium, Ireland and Luxembourg.
However, with the UK now looking to negotiate an “enhanced equivalence” – a much-watered-down version of mutual market access – the spotlight has fallen on the broking community.
“Depending on where this goes, from our perspective, there will be a greater issue in solving the broking challenge than there will be for the carriers,” says Malcolm Newman, managing director of SCOR EMEA and chairman of the London Market Group’s ILS taskforce.
“We already have equivalence in the carrier community [through Solvency II], but there’s no concept of equivalence within the broking world, so this would have to be invented, not just enhanced and I think that is more worrying at this stage,” he adds.
For carriers, proposals around enhanced equivalence will mean looking at what is stated in Solvency II.
However, there is no there is concept of equivalence for brokers, who currently adhere to the Insurance Mediation Directive – which is to be replaced on 1 October, 2018 by the Insurance Distribution Directive (IDD). “There’s been a certain lack of appreciation in European circles that insurance is something that is traded across borders as much as it is,” says Christopher Croft, chief executive of LIIBA.
“The reality is that for the UK, there is a huge amount of cross border insurance trading. All the £9bn worth of premium which comes from EU clients into London, plus what we see from some of the global programme placements that we place for non-EU clients, but with EU coverage, that’s all utilising the passport.
“So, when they talk about ‘enhanced equivalence’ as a solution we have to work with, we don’t know what that means, because there is nothing [in either directive] which says, this is what equivalence is and this is what we allow you to do,” says Croft.
However, having to start from scratch presents the London broking community with an opportunity to help define how these Directives, namely the incoming IDD, could term “equivalence”.
Croft confirms LIIBA is working with the UK Treasury, turning to some of the models used in the banking sector to help with the framework.
“What we want to do is be in a position to service EU clients and their best interests with the correct levels of regulatory oversight,” says Croft. “If London is the best location for the risk, we want arrangements to be made available for clients so that insurance can be placed in London using the wholesale framework either via an EU producing broker, or through a direct placement from an EU subsidiary back to its UK entity, both efficiently and cost effectively.”
But EU regulators within the member states could view this as simply ‘letterboxing’ the business back to London, Croft explains, which is something they will need to work around. “We just want it to be simple and at this stage we’re agnostic over the method, and more focused on the outcome,” he says.
“Whether or not that is all allowable in the event of a ‘no deal’ is entirely down to the individual laws in the EU27. On balance, the consensus is that it is, but it’s not absolutely clear, nor certain,” he adds.