UK and German Insurance experts gather in London to discuss post-Brexit options. UK insurers and reinsurers advised to consider longer term options offered by mature insurance centres such as Cologne to maintain access to huge EU insurance market. Adrian Ladbury reports.
UK-based international insurers and reinsurers that have chosen ‘light touch’ and low cost options to set up their EU operations to continue doing business across Europe post-Brexit will have to watch regulatory developments very closely to ensure their access is maintained as regulators’ attitudes can change very quickly, warned a group of leading experts at an event held to discuss the implications of Brexit for the insurance and asset management sector in London this week.
OMFIF, the independent forum for central banking, economic policy and public investment supported by global public investors with investable assets of $33.8tn, hosted an event this week in London entitled ‘Investment landscape, Germany and the UK after Brexit’. The discussion was sponsored by NWR.INVEST, the economic development agency for the huge North Rhine Westphalia region which has close and long links to UK business. It was also backed by the City of Cologne and Cologne Chamber of Commerce and Industry (IHK) which have together recently launched Insurance-hub Cologne, an effort to attract international insurers and reinsurers to this leading German insurance and reinsurance centre.
The meeting focused on changing investment trends for insurance companies and asset managers in the light of the UK’s impending departure from the European Union. Speakers from the UK and Germany discussed the opportunities that Germany offers for UK-based insurance companies and asset managers as they asses their strategic options post Brexit. Many UK-based international insurers and reinsurers that wish to continue doing business across the EU have selected Luxemburg or Brussels (notably Lloyd’s of London) as their base of operations rather than an established insurance and reinsurance centre with direct access to brokers and customers such as Cologne, Paris, Madrid or Milan. The reason for doing this is clearly the flexible and accommodating nature of the regulators in such domiciles that are keen to attract the new business, the likely significant tax advantages offered by these specialist centres and the fact that, in many cases, very few staff need to be actually based at the new EU operations. Most of the operational functions can seemingly be outsourced to specialist companies already based in these domiciles and the vast majority of the business that is theoretically underwritten in many cases for either Luxemburg or Brussels can simply be reinsured back to London. These factors make it difficult for established insurance and reinsurance centres such as Cologne to compete despite the many advantages on offer to companies that are genuinely interested in building a long-term business at the heart of Germany and Europe. But, the group of experts gathered by OMFIF for this week’s event questioned whether this apparently neat and simple fix to the Brexit problem for UK-based insurers and reinsurers is really a viable long-term option.
The speakers were asked by one delegate why only two international insurers and reinsurers – Newline and Markel – had chosen Germany as their base for EU operations and the rest had so far opted for Luxemburg, Brussels or Dublin.
Martin Mankabady, partner and global chair of the insurance group at Dentons, the world’s largest law firm, advised that many UK insurers and reinsurers had thought long and hard about their Brexit strategy. He said that it remains though an open question as to whether the national EU insurance supervisors – represented by the European Insurance and Occupational Pensions Authority (EIOPA) – will allow UK-based international insurers and reinsurers to set up thinly staffed operations in domiciles such as Luxemburg and reinsure all the business back to London in the long run.
“I think that Luxemburg has been the big winner in terms of where new EU platforms have been established and in what has become quite a fragmented environment. One may have expected a leading European financial centre such as Frankfurt for banking or, for example, Cologne for insurance to attract significant business because of Brexit but this has not happened,” said the specialist lawyer. “Tax may be a factor of course. But, I think the main issue is actually the speed and ease of setting up an operation and ability to outsource most of the operational functions. However, there appears to be a gap between what some insurers and reinsurers are planning to do on the ground and what EIOPA expects. EIOPA has very clearly stated that it expects to see a limit on the amount of the business underwritten by these operations ceded back to London via reinsurance. It expects to see a meaningful retention. Lloyd’s, for example, as I understand it, appears to expect to be able to reinsure 100% of the EU business underwritten in Brussels back to London. It will be interesting to see how this pans out,” said Mr Mankabady.
Reiner Gleiss, a former senior executive with leading international insurers in Germany and London and now a consultant to the City of Cologne and IHK with its Insurance-hub Cologne initiative, asked the speakers how quickly they felt EIOPA would move to address the situation. “I feel that EIOPA has got to be stricter on Luxemburg and other domiciles which allow all the main management functions to be kept in London. The German insurance supervisor (BaFin) and the French insurance supervisor have clearly said that if you want to come here to do business then you have to really come here and staff and manage the business properly on the ground. How can this contradictory situation be allowed to continue?” asked Mr Gleiss.
Mr Mankabady suggested that EIOPA would possibly be forced to act in time to close this ‘loop-hole’. “Those insurers and reinsurers that have set up operations with a staff of 10 people, use outsourcing agreements to do the bulk of the work and plan to reinsure the business back to London will have to ask themselves what may happen in say five-years’ time. They may be forced to rethink,” he said.
Werner Görg, Supervisory Board Chairman of Cologne-based insurer Gothaer Group, member of the executive committee of the German Insurance Association (GDV) and President of the IHK, said that he believes that the so-called ‘light touch’ options offered by specialist financial centres such as Luxemburg, Brussels, Dublin and the like compared with Germany and other leading EU nations is unfair and needs to be addressed. “I agree that the ability to outsource key functions and not have to hire the specialist management people on the ground in domiciles such as Luxemburg is the main factor in the choice of domicile for UK-based international insurers. There are 24 UK-based insurance and reinsurance companies that have set up EU operations in Luxemburg so far and the lack of clear and consistent guidelines on outsourcing management functions, how to apply BEPS [the OECD’s Base Erosion and Profit Sharing guidelines designed to stamp out tax evasion] and the like is one of the main reasons this is happening. This is the wrong way around. If you are underwriting German business then the main functions need to be in Cologne and limited management functions in London,” explained Mr Görg.
The German insurance leader also said that the tax factor should not be underestimated. “The tax situation in Luxemburg and Ireland is completely unfair. If you consider the equalisation reserve that can be built up in Luxemburg on an almost tax-free basis and effectively treated as equity on a long term basis and the low rate of corporation tax in Ireland, this is extremely unfair and will not last in my view. This situation will not last for eternity and I am optimistic that genuinely long-term insurance centres such as Cologne will attract the business in the longer term,” continued Mr Görg.
David Marock, CEO of Charles Taylor, the London-based global insurance services and technology group, said that he is not so sure that EIOPA will feel that it has to deal with this supposedly unfair advantage enjoyed by specialist insurance centres such as Luxemburg with regards to Brexit. “I think there is a risk of overplaying Brexit. The fact is that outsourcing is happening in all industries on a worldwide basis whether that is within the EU or outside. Many businesses, particularly volume-based businesses, have been outsourcing processing and the like outside of the EU for decades. Also look at Solvency II and how it is applied across the EU by national supervisors. People claim there are big differences in national supervisors’ approaches,” he said. “I do not see going to Luxemburg or elsewhere as a ‘back-door’ approach to Brexit or an example of soft regulation. This is about access to the regulator, being able to sit down and discuss one’s situation and not have to wait six months and then attend a meeting filled with lawyers, to get an answer. It is about flexibility and accessibility,” pointed out Mr Marock.
Helmut Söhler, Member of the Executive Board of InsurLab, the Cologne-based centre of the fast-growing German InsurTech industry and experienced senior executive in the German and international insurance and reinsurance industry, agreed with Mr Marock that currently there appears to be no reason why international insurers should not set up a thinly staffed EU bases in Luxemburg and continue doing business across the EU. But, he did point out that regulatory attitudes can change very quickly. Those insurers and reinsurers that are genuinely keen to maintain and build a pan-European business should therefore at least investigate a more substantial, on the ground, base in a mature market such as Cologne. “There is competition between countries within Europe and not least the specialist insurance domiciles and there always has been. This leads to unwelcome and unfair competition everyone cries, but, it continues. The question is how long will this last, how long will I be able to use Luxemburg or Brussels, what are the options and what is the price of the options. If you are based in Luxemburg and the rules change so that you cannot be based there anymore but you only have 10 people there then it is not such a big deal. You have to be prepared for change. I recall the days when Dublin was a very relaxed place to do insurance and reinsurance business but now the Central Bank of Ireland is at least as strict as the regulator in the UK. Things can change very quickly so you need to carefully consider the options,” explained Mr Söhler.
Brexit is not a simple matter by any means and the result remains very unclear. But what is clear from this discussion is that those insurers and reinsurers currently based in London need to think long and hard about their long-term strategy for maintaining access to the huge German and wider European insurance market post Brexit. Flexible and low cost centres such as Luxemburg or Brussels currently appear to offer a ‘quick fix’ solution that ticks the boxes. But those insurers serious about the European market need to keep a very close eye on regulatory developments and at least take a look at alternative options offered by more established centres such as Cologne.