Select Committee on Treasury Written Evidence

Supplementary memorandum submitted by Stephen Sklaroff, Deputy Director General,

the Association of British Insurers


  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]


  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.


  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.

1   Q8 Back

2   Q37 Back

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