July 2016
The UK’s momentous decision to leave the European Union has eclipsed everything else in the news agenda in the days since the verdict was delivered, and ushered in a period of fevered political interest.
And the temptation is to read straight across from that blanket coverage and pervasive preoccupation to our professional lives, interpreting “Brexit” as the primary fact in business life and the biggest risk to P&Ls.
It isn’t. Mispricing risk, miscalculating reserves and misallocating investment funds remain the cardinal dangers for the global specialty (re)insurance sector with major involvement in the UK market. For brokers, the obstacles are losing talent, strategic myopia and regulatory risk.
As the business community in this country made clear before the vote, Brexit is damaging to business. The putative benefits that the UK public chose were cultural: a staunching of the flow of immigrants; a sense of undue foreign influence thrown off; and a longed-for repatriation of sovereignty.
The electorate knew that stock markets would plunge and business confidence would suffer, but it narrowly supported Leave anyway, accepting the economic shock as the price of self-assertion.
But although damage has been caused – across the economy and to the global specialty insurance sector specifically – the gravity and scale of that damage must not be exaggerated.
The structural pressure on the Remain side to exaggerate the risks ahead of time and the media’s inbuilt bias towards sensationalism were always likely to set in train a panic that was disproportionate – and it is for us to now be level-headed in analysing the economic downsides.
Brexit is a blow to the London market, and it has come at absolutely the wrong moment for a sector hurtling towards a painful correction, but the impact is manageable and can be contained.
The danger for EC3 is more that this is yet another wound for a market already bloodied by microeconomic threats.
The London market – the whole global specialty space, in fact – is coming to terms with a challenged competitive landscape in which benign catastrophe experience and below-trend loss emergence has left companies’ returns living on borrowed time.
Huge overcapitalisation stoked by alternative capital and turbo-charged by the zero interest rate environment is putting underlying returns under huge pressure. At the same time, changes to distribution threaten to accelerate exponentially if the fin-tech silver bullet can be found, leaving returns poised on the edge of a sheer cliff.
Brexit is making itself felt within this broader context, and is following years of good reported results and frothy stock market performance that had little to do with the developing fundamentals of the underlying business.
It still seems likely that the biggest conduit for damage will be insurance-specific, rather than reinsurance, as a collapse in confidence stifles domestic and inwards investment, depressing activity and cooling down the broader UK and world economy that the insurance sector relies on for volume.
Monetary policy in the UK, and to a lesser degree internationally, will bear the stamp of Brexit for months and probably years to come – choking off any prospect that interest rates will start to creep up from their post-crisis lows.
Mark-to-market gains may do something to ease matters in the short term, but many will be dismayed by the news that a longed-for restoration of risk-free returns is again being deferred.
Speak to the great and good of the London market in their candid private moments – when they are not talking in statesmanlike tones about EC3’s robustness and their bulletproof contingency plans – and they protest about passporting being imperilled.
But the threat to the market from this quarter has to be kept in perspective. Continental Europe is a relatively small piece of the puzzle for the London market – small even when it is looked at on the basis of the top line it provides. When the marginal nature of much of the business is factored in the impact on the sector’s profitability even if all passported business was forfeited would be relatively undramatic.
And that is if the politicians are unable to stitch together a compromise, if carriers cannot put in place alternative infrastructure and brokers cannot mediate fronted solutions.
Other carriers are concerned that Britain’s brand is sunk, that a country that has voted Leave has become toxic in the eyes of the open, internationalist elite that London needs to attract to maintain its status as the global specialty insurance sector’s imperial city.
But again this risk is overstated. Even casual observers know that the Leave vote was driven from outside the capital and by a demographic very different from those strolling through the revolving doors of the Walkie Talkie and riding the external escalators into the Cheesegrater.
The London market is an increasingly cosmopolitan place that has made clear its determination to draw in the industry’s best talent globally. It was foursquare behind the Remain campaign and reflected the spirit and values of those who wanted to stay engaged internationally.
Talented individuals from other countries will not eschew London because Sunderland voted to leave, and the world’s best and brightest will command enough points or the sponsorship they need to slip untroubled past the immigration hawks.
London can ride out the challenges it will face – it just could have done without a political earthquake that landed it with further challenges at this particular moment in time.
Perhaps the ultimate irony in a post-Brexit world is that the London market has always held the semi-detached status from continental Europe that just over half of the country has now decided that it should also have.
London’s failure to make it on the continent has just moved from being a weakness to a strength…
