Insurance Monitor: Brexit: finding corridors of deviation

Insurance monitor march 2020

In this month's column, David Worsfold, a long-running commentator on the insurance market, explores how the insurance industry could find itself rather lonely in its corridors of deviation after Brexit is finalised, the complexities of Covid-19 for the sector and the cost of Gibraltar to UK insurers.

Those insurers and brokers that want to shake-off some aspects of European Union regulation when we finally leave the EU at the end of this year seem slowly to be winning the upper hand.

The Association of British Insurers has long argued that it does not want the UK insurance sector to be a rule-taker after Brexit is finalised. It is an argument that is gaining traction. It is not always winning the industry many friends in other parts of the financial services sector. Banks, asset managers and traders are rather keener to ensure equivalence is secured for the whole UK financial services sector before some parts start deviating from it.

There are 40 sets of equivalence rules derived from 17 different EU directives so there is a lot at stake. Nerves jangle across the City at the prospect of equivalence being withdrawn at just 30 days’ notice, the current EU proposal.

The ABI’s deputy chair, Julian Adams, made the industry’s case to the influential House of Lords EU sub-committee earlier this month. He argued for variation of the rules for professional buyers in the wholesale insurance market and for relaxation of the risk margin that restricts annuity providers. He spoke about exploring “corridors of permissible deviation.” Other City representatives that appeared before the committee were not so keen to join the insurance industry in exploring unknown corridors, frightened of where they might lead.

Almost as Adams was setting out his case to their Lordships for being selective about equivalence, former Conservative leadership candidate and London Mayor hopeful Rory Stewart was backing the insurance industry’s approach.

He told a briefing of senior European journalists that although he believed London as a whole “does better from market access than from deregulation” there were exceptions.

“Take insurance. Some divergence could be benefit them. For instance, there is frustration at solvency regulations that restrict the ability to invest balance sheets in infrastructure. They would welcome some relaxation of that.”

The ABI might congratulate itself on winning the argument over slavishly sticking to the current EU rules, and will be especially pleased when senior politicians start advocating it for them, but the industry could find itself rather lonely in its corridors of deviation. If the EU plays tough and says that if one financial sector ducks out of equivalence then all 40 sectors are out the insurance industry would quickly lose friends in the City. The signs that the EU could be that ruthless are there and the recent speeches from the UK’s chief negotiator David Frost do not offer much hope of flexibility on the UK side either.

When the EU’s draft negotiating position emerged from its scrutiny by the European Parliament, the Commission’s initial draft had been beefed up to talk about requiring “dynamic equivalence.” That means every time they change a rule, we would have to follow without question.

Now, that really would be rule-taking.

Gibraltar needs to get a grip

Gibraltar is costing us money. The news that failed after the event insurer Elite has a £69m black hole in its accounts comes hard on the heels of motor insurer Quick-Sure going into administration

As the corporate body count mounts up on the Rock so the bills UK insurers will have to pay rise.

The UK’s Financial Services Compensation Scheme has already reported significant payouts for the failures of Lamp and Enterprise and will now be faced with additional demands to compensate the policyholders of more collapsed firms. 

What is the Gibraltar regulator’s response to this sorry tale of failures on its watch?

Why, to cut its staff to save money of course.

The Gibraltar Financial Services Commission says it has completed a comprehensive organisational restructure. What this actually means is that it has cut its staff. This is not a big organisation considering the range of businesses it has to supervise but its response to the problems it is facing is to cut its staff by almost 25%, from 100 to 78, on top of earlier cost cutting measures that included a recruitment freeze.

This has all been done to create a “flatter, wider and more inclusive management structure”, according to the GFSC. How on earth that is meant to make it a more effective regulator it doesn’t say. A little less management consultant speak and a bit more decisive action is what is really needed.

Covid-19: pitfalls for insurers

Here’s a prediction (or two): Covid-19 will make some lawyers very rich. And it will be on the back of the insurance industry.

The seeds are already being sown for some high-profile disputes over claims arising from the deadly virus that has already claimed the lives of around 2000 people and for which there is no effective treatment.

This will be driven by event organisers forced to cancel major events, leaving them with multi-million bills. They will look to their contingency insurers to reimburse them and already we are seeing insurers sharply diverging in their responses.

The disputes will be complex and fraught. While I am not saying that the cancellation of the Mobile World Congress, the world’s biggest phone show worth around €500m which is held in Barcelona each year and is attended annually by around 100,000 people, will result in litigation, it perfectly illustrates the potential complexity of the claims that might arise when more events succumb to the virus – or at least to the fear of it. 

The organisers cancelled the show when several major exhibitors pulled out, including LG, ZTE, Ericsson, Nvidia, Intel, Vivo, Sony, Amazon, NTT, Docomo, Cisco, Nokia, BT and HMD. Reports in the Spanish and telecommuncations media suggest that the MWC delayed making the decision in the hope that the Catalan health authorities would declare a health emergency and oblige them to pull the show. The authorities would not budge from their keep calm and carry on message and so now the MWC and its exhibitors will have to pore over the force majeure clauses in their insurance policies to see if there is any prospect of them recouping some of their losses.

Of course, no-one knows if the claims that will flow from this one event will all be settled amicably or whether they will drag on for years. However, it illustrates perfectly the complexity, the powerful commercial interests and the dangers for the insurance industry. I expect there is no easy solution, except to budget for those lawyers’ bills. 

Peter Staddon: farewell to a true professional

When I am asked why I have always returned to writing about the insurance sector, I say one of the reasons is the people. Almost none of those who make it to the top in the industry chose a career in insurance and this gives them a degree of humility that you do not always find in other professions. It also means that many – most – are thoroughly decent people.

One of those is Peter Staddon, who has announced that he will be retiring from his role as managing director of the Managing General Agents’ Association at the end of June. He is professional to his fingertips, always courteous even when I asked the daftest of questions. He will be missed. 

He will be able to look back with pride at his record at the MGAA and his contribution to the British Insurance Brokers’ Association before that when he retires.  

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