Increased regulation rarely goes down well with the business community, but a chorus of voices from the London market recently has demonstrated just how strongly insurers are opposed to the rising cost of regulation, writes Mayer Brown partner Colin Scagell.
These voices have also highlighted their fears that a potential ‘Brexit’ could lead to even higher costs of regulation for the domestic insurance industry.
Many high profile industry professionals have pointed out that the rise in regulatory costs could harm the competitiveness of the UK insurance industry on a global scale. In brief, the rising cost of regulation that insurers will be facing next year includes:
· the Prudential Regulatory Authority (PRA) proposals to raise its industry charge for ongoing regulatory activities by an average of 4.7%;
· the levies on the Society of Lloyd’s for ongoing regulatory work rising by 5.6%; and
the Financial Conduct Authority’s plans to increase costs for UK general insurers and Lloyd’s managing agents by 8.5%.
While the PRA has stated that the 2015/2016 increases are necessary to cover the cost of staff in preparation for Solvency II – which comes into effect on 1 January 2016 – market commentators additionally point to the fact that the UK already faces higher regulatory costs than some of its European counterparts.
While Solvency II aims to harmonise rules across the EU, it is up to national authorities to implement their own national regulatory framework, which in this instance means that UK insurers face a heavier costs burden than those based in other European jurisdictions.
At a time when the industry is going through a significant period of consolidation on a global scale, the burden of additional costs from the regulators put UK insurers on the back foot while newly created global counterparts snap up market share.
A further threat to the London market’s position on the global stage for insurance also comes in the guise of a potential ‘Brexit’ after a referendum on the UK’s EU membership was confirmed in the Queen’s Speech that sets out the new government’s legislative agenda.
Senior executives like Lloyd’s of London chief executive Inga Beale have pointed to the importance of UK insurers remaining part of a wider community, especially in today’s era of globalisation. There is a further concern amongst market professionals that the UK’s potential exit from the EU could lead to regulation impacting the domestic market, as national regulators renegotiate powers from Europe and create a standalone regime.
Both direct and indirect costs of adapting to such a regime could well be significant, particularly in the context of costs already incurred in meeting the long awaited and often delayed Solvency II project. The uncertainty currently hanging over the industry can act as a drag on investment and can dissuade industry players from making strategic plays – instead seeing them treading water until some clarification emerges.
The EU referendum is due to be conducted before the end of 2017 but recent indications are that it is more likely to take place in 2016, so it is hoped that this period of uncertainty is kept to a minimum. In the meantime, UK insurers will continue to plan carefully in order to be able to absorb the upcoming hike in regulatory costs and of course ensure that they have taken all the steps they can to be fully compliant with the requirements being put upon them, not least those contained within Solvency II which draws ever closer.
The rising regulatory costs of doing business in the UK isn’t the only headwind buffeting the industry. When placed in the context of a generally soft market and the challenges of operating in a low investment return environment some seasoned industry participants are calling out current conditions as the most challenging they’ve encountered. Others however, particularly new entrants posing an alternative model, see only opportunities.