Insurance Jottings
Post-Brexit Reality: Europe Will Still Need London for Finance and Business – Opinion
Article from The Insurance Journal
Brexit could one day give the European Union an opportunity to challenge the City of London’s dominance as a global financial hub. Right now, however, the EU is in no condition to take advantage.
As talks on Britain’s future relationship with the union come down to the wire — yet again — London’s role as the bloc’s primary purveyor of financial services is under scrutiny. By the end of this year, the EU must decide whether to grant UK-domiciled firms unfettered access to its market or to set up barriers that would require them to move operations to the continent.
At stake are businesses including trading stocks, managing investment funds, and clearing and settlement, which entails keeping track of who owes what to whom in currency and derivatives markets. Some big companies, including JPMorgan Chase & Company, are already shifting assets and personnel.
There are potential benefits, to be sure. Promoting financial centres on the continent could have advantages for the EU quite apart from the jobs and revenue that the union hopes to gain. For one thing, it could reduce systemic risk. Concentrating so much financial business in the UK magnifies the effect of political and economic events in one country — as the Brexit process itself has eloquently demonstrated.
A gradual shift need not be entirely negative even for the UK, which faces the challenge of accommodating an outsized banking sector, with assets of more than four times the country’s annual economic output.
Shifting some of this activity to other places — such as Paris, Frankfurt and Amsterdam — would lessen the strain.
That said, demoting London would also impair the efficiencies and advantages of having everything in one place.
And those advantages are vast. One example: The ability to clear and settle various kinds of derivatives — including forex, interest rates and credit — through one central counterparty
allows financial institutions to free up billions of euros in collateral by netting positions and risks. More broadly, concentrating a lot of finance expertise in the same city enhances the flow of talent and knowledge, boosting productivity and growth.
The right balance from the EU’s point of view is debatable and will change with time.
For now, though, one thing needs to be emphasised: to replicate London’s benefits, Europe would have to be a true economic union, with seamlessly integrated and well-supervised banks and capital markets. It’s not there.
Even before the global pandemic hit, European banks were poorly capitalised and straining under the burden of more than €500 billion worth of bad loans. Europe’s leaders are nowhere close to instituting risk-sharing mechanisms, such as mutual deposit insurance, needed to ensure the currency union’s viability. A capital-markets union — which would harmonise bankruptcy, accounting and other rules to facilitate cross-border investment — remains a work in progress.
In some respects, the EU is actually less financially integrated than it used to be. Despite sharing a currency, France, Germany, Ireland, Luxembourg and the Netherlands, all of them vying to become financial hubs, are less closely linked than they were a decade ago, judging from euro-area cross-border lending data.
In the longer run, if Europe manages to address its flaws, financial business will likely migrate from London without further inducement. But forcing the matter will make everyone worse off. For the time being, EU negotiators should find a way to maintain the continent’s financial connections to the UK.
This means, among other things, a medium-term guarantee that UK-based firms will be able to freely offer their services throughout Europe, as long as UK regulations don’t stray too far from the EU’s (a version of what officials call equivalence).
Coming to such an understanding won’t be easy, and the erratic manoeuvres of Prime Minister Boris Johnson’s government certainly aren’t helping. But it’s in everybody’s interests that pragmatism and mutual advantage should prevail.
UK government signals post-Brexit shake-up to Solvency II
The UK government has said it is working with the Prudential Regulation Authority (PRA) to reform the Solvency II risk margin as part of a review of its implementation of the European Union’s capital regime.
UK Should Adjust Rules for Financial Services to Stay Competitive After Brexit: Study
Britain should tweak financial rules after full Brexit to keep London’s financial hub competitive and deepen ties with growth markets in Asia, a think tank said in a study on the 19th October.
Britain accounted for nearly a third of financial activity in the European Union, which it left last January, and will no longer have to comply with its rules after the 31st December.
New Financial said in its study “Beyond Brexit,” supported by Barclays bank, that leaving the EU would be a seismic change and involve significant disruption for the banking and finance industry’s relations with the bloc.
Britain is unlikely to get much direct access to the EU financial market but will be a significant “free agent” that can use its expertise in derivatives, trading, fintech and sustainable finance to shape global standards, the study said.
Big, strategic decisions will be needed but a moratorium on substantial divergence from EU rules for at least a year would give banks a chance to adjust to the new world, it said.
“While the geopolitical backdrop is acutely challenging we think there is an opportunity to develop trade in financial services and closer partnerships with markets like the US, Japan, Switzerland, and other smaller markets such as Singapore and Australia,” the study said.
Tweaks to bank and insurance capital requirements, taxation and supervision would help London stay competitive globally, the study said.
Britain should set up a commission to review the competitiveness of the UK financial sector, the study said.
UK regulators have pushed back against calls from lawmakers to be given a formal remit to keep London’s financial competitiveness in mind when writing new rules.
The study comes ahead of the anticipated publication of the government’s financial services bill setting out a post-Brexit model for regulating finance and keeping it competitive.
Pirate Kidnappings in Waters Off Coast of West Africa Rise by 40%
The number of kidnappings reported off the West African coast in the year through September is 40% higher than the same period in 2019, according to the International Maritime Bureau.
Piracy incidents in the Gulf of Guinea contributed to a total of 132 global attacks in the first nine months of 2020, up from 119 in the prior period, the IMB said in a report released on the 14th October.
Out of 85 sailors taken for ransom around the world, 80 were seized off the coast of Nigeria, Benin, Gabon, Equatorial Guinea and Ghana, it said.
Incidents on vessels in West African waters have been rising in recent years, with attacks targeting crew rather than the ship or its cargo. The region has overtaken south-east Asia as the worst area for piracy and kidnappings, driving up insurance premiums for shippers.
EU warns insurers on Brexit preparations
European insurers have been warned by the Union’s industry watchdog to get their post-Brexit operations in order and to ensure they are fully prepared for the UK’s exit from the EU’s regulatory framework at the end of the year.
Lloyd’s Reviews Product Design of Insurance Contracts in Response to COVID-19
Lloyd’s is reviewing the way insurance products are designed and sold as it calls for simpler products in response to the coronavirus pandemic, the commercial insurance market said on the 12th October.
Insurers have suffered reputational damage as a result of complex products which are hard for businesses to understand, leading to court cases over whether policyholders are covered for the pandemic in countries including Britain, France and the United States.
“The insurance industry must urgently reassess how it can better serve and support its customers,” Lloyd’s Chief Executive John Neal said in a statement.
He said it was imperative to build simpler insurance products which are more easily understood.
Lloyd’s, which runs an insurance market of more than 90 syndicate members, said it would review how products were developed, designed and sold.
It also laid out recommendations for simpler products in a report published on the 12th October.
These include insurers carrying out a “linguistics review” of policy documents, investing in new products such as parametric insurance which pay out immediately when specific triggers are hit, and involving customers in product design.
A test case over business interruption insurance brought by the Financial Conduct Authority (FCA) against eight insurers, including several with a presence at Lloyd’s, is heading for the appeal courts after the regulator said the initial judgment ruled mainly in favour of policyholders.
The case, which is expected to affect more than 60 insurers, 370,000 policyholders and billions in insurance claims, is being closely watched overseas.