Supplementary memorandum submitted by
Stephen Sklaroff, Deputy Director General,
the Association of British Insurers
ABI EVIDENCE: SINGLE EUROPEAN INSURANCE MARKET,
FLIGHT TO BERMUDA
During my evidence to the Select Committee on
Wednesday 14 December, I agreed to write to the Committee on two
points: the extent to which ABI members have taken up the opportunities
presented by the Single European Market;[1]
and the possible links between a flight of insurance capital to
Bermuda and recent EU Directives.[2]
ABI MEMBER ACTIVITY
IN OTHER
EU MARKETS
I enclose a list of ABI member companies active
in other EU Member States. The length of the list demonstrates
the extent to which ABI members have capitalised on the opportunities
offered by the Single European market to conduct business in other
EU markets. It is worth noting that very little of this is cross-border
retail business. As was discussed at the meeting, national tax,
social security, and benefit systems, and the local nature of
risks, mean that most customers prefer to do business with insurers
established in their local markets. Insurers therefore tend to
set up subsidiaries to do business in the markets where they wish
to operate. This is why our focus in the EU remains on better
and more consistent implementation of existing EU legislation,
to ensure as level a playing-field as possible, along with the
convergence of prudential (capital adequacy) supervision, rather
than measures aimed at artificially boosting cross-border trade
in retail products.
British insurers' expansion into Europe has
been mirrored by an increase in the presence of European insurers
in the British market. Major European insurers such as Zurich,
Groupama, AXA, and Allianz all have a sizeable presence in the
British market and are active members of the ABI. In fact, International
Financial Services London (IFSL) estimate that 23% of the insurers
now active in the British market are foreign-owned. This figure
highlights the openness of the UK market place to foreign insurers.
FLIGHT TO
BERMUDA
I also agreed to write to the Committee about
the relationship between recent inflows of insurance capital to
Bermuda, and increasing regulatory burdens in the UK and the EU
more generally. Comments by the Investment and Life Assurance
Group (ILAG) had suggested a possible link in particular to the
recent Insurance Mediation Directive.
We have looked into the issue, and what follows
draws on discussions we have held with colleagues at Lloyd's and
the Investment and Life Assurance Group. The first point to be
made is that much of the recent inflow of capital to Bermuda has
been reinsurance capital. In 2005, there have been a number of
reinsurance start-ups in Bermuda. For example, new divisions of
existing Lloyd's insurers such as Amlin, Hiscox and Omega, and
new start-up companies such as Validus, Flagstone Re, Harbour
Point, Ariel Re and Lancashire (recently floated on the Alternative
Investment Market). In addition, Greenlight Re has recently set
up in the Cayman Islands.
A direct causal link with the Insurance Mediation
Directive is unlikely, because all these companies are reinsurers,
working in the business-to-business market, and so likely to be
less affected by the additional regulatory burden of the Insurance
Mediation Directive than intermediaries and direct insurers selling
to the public.
However, it remains the case that increased
regulatory burdens have an effect on capital allocation decisions.
Incrementally, such burdens are likely to drive mobile capital
away from the City of London, to the detriment of the British
economy overall.
It is difficult for us to offer definitive comment
on individual companies' decisions to establish in Bermuda. The
regulatory environment will be one factor, but by no means the
only one. Other factors will include the favourable tax regime
in Bermuda, geographic proximity to the US, access to business
opportunities not offered in London, and the opportunity for reinsurers
to diversify trading platforms. However, it would clearly be wise
for both the Government and the FSA to pay close attention to
the impact of increased regulation on the attractiveness of London
as a location for insurance business. If the current advantages
of London as a location are eroded, there could be serious losses
in the future to both British jobs and overseas earnings.
You may find it helpful to discuss the Bermuda
issues further with the Investment and Life Assurance Group.
I hope that this is useful. Please do not hesitate
to contact me should you require any further information.
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