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Lloyd’s Chief Risk Officer, Sean McGovern gave a speech to the Insurance Institute of London about the potential impact on the London insurance market of the United Kingdom voting to leaving the European Union.

The speech, given in the Old Library to an audience of key insurance and risk figures from across the City, provided an in-depth analysis of the key issues that would be affected, including the UK’s access to the single market, trade with Europe and other territories and on the direct investment that comes into the UK from the EU and beyond.

The full speech is available below.

Thank you to the London Institute for the invitation to speak today on this important issue. Little did we know when this lecture was scheduled some 12 months ago that it would prove to be at such a critical stage in the negotiations.

I am going to confine my remarks today to the issues that I think will impact upon the London insurance market. Lloyd’s Chairman, John Nelson, is already on record on the importance of membership of the EU both to Lloyd’s and the wider economy. In my role as Chief Risk Officer I have been heavily focused on the ramifications of the referendum and the possibility of a vote to leave.

It may be a statement of the obvious, but exiting the EU will create a level of uncertainty, for Lloyd’s, for the London market, as well as the UK and European economies, we have rarely experienced.

Now, Europe is a subject that elicits very strongly held views from people on both sides of the debate. It has no doubt been a lively discussion topic over the past few weeks and months with your colleagues, friends and family.

Ultimately, this is a decision that will be made by all of us and I am certainly not telling anyone how they should cast that vote. However, it is a decision that should, where possible, be informed by an understanding of the facts and the consequences of what happens should we vote to remain in the EU or vote to leave it.

My own small contribution to the debate will be to set out those facts and consequences as they relate to the business interests of the London insurance market and attempt to draw some conclusions on the impact of a vote to leave.

I also want to provide assurances to the Lloyd’s market that we have been working on this issue very actively. I am leading a team which is building out our contingency plans to deal with a range of possible scenarios. The objective – to ensure that Lloyd’s can continue to provide our market with access to the EU. Whilst there will be more work to do in the event of a vote to leave, we are confident that this objective can be achieved and that we will be able to provide ways to allow business to continue to be written on both a cross-border and a branch basis.

Where we are today

I think it is fair to say that the UK/EU relationship has always been a pragmatic one. Continental Europe has often felt different to the UK – with our island status or our shared language, culture and history with the Commonwealth nations like Canada or Australia. The Continent has always been a little further away, albeit on our doorstep.

Many Europeans question our commitment to the European Union. Do we really want a seat at the Brussels table at all? However, the pragmatism I have spoken about has served the interests of the UK and the interests of the EU. It has enabled us to reach accommodations on issues that have been to our benefit, particularly in the financial services sector.

Other EU members support the UK’s continued membership, even if there are occasional expressions of impatience or exasperation at British attitudes towards the Union. They recognise that the UK is still one of the world’s largest economies and has recognised political, economic and diplomatic weight. Britain’s continuing membership strengthens the Union overall.

But clearly, the British people remain to be convinced that the economic and other benefits of this pragmatic relationship with the European Union are worth it.

If we look back to the 1975 referendum, the UK voted to stay in the EU. 67% voted to remain in and 33% to leave.

The polls are rather closer in 2016. A recent “poll of polls” by “What UK Thinks” suggested 52% “remain” and 48% “leave”. Some polls say that it is even closer, or that “leave” are in front.

The Prime Minister’s speech last week has set out a package of measures that he believes can form the basis of a renegotiation, with a welcome focus on “hardwiring competitiveness” into the European Union.

I am not going to comment on a live negotiation but I will say this. From a Lloyd’s perspective, we would support any agreement that improves competitiveness and drives efficiency into the functioning of the EU and how business is conducted across Europe, whilst at the same time, protecting Britain’s interests.

I have been responsible for Lloyd’s engagement with Brussels for the past 10 years and I know that the EU is not perfect. I have seen the good and the bad of working at close quarters with Brussels.

Over recent years the EU has been inwardly focused, shown an over-enthusiastic desire to regulate and paid little attention to ensuring that EU based businesses are positioned to compete around the world.

Any change that has competitiveness at the heart of what the EU does must be welcomed. There is progress under the Junker Commission. It is seeking to reposition the EU with various initiatives to free up financial markets through the Capital Markets Union, reduce regulatory burdens that are constraining the ability of financial services to enable business and focus more attention outside the EU through the negotiation of new trade deals.

The UK holds key influential powers in the development of EU financial policy, with Lord Hill holding the post of Commissioner for Stability, Financial Services and Capital Markets Union until 2019.

In my experience, the tone of the Commission’s interaction with business has changed. There is an openness and willingness to discuss and debate that did not exist two years ago. I believe the Commission has clearly been listening to the voices of politicians and indeed business about what needs to be done to complete the single market within the EU, how to improve the competitiveness of the world’s largest trading block and leverage that scale by looking outwards to negotiate favourable market access to the faster growing economies of the world.

This shows how politics has its own effect. The proposed referendum has prompted a welcome debate about how to reform the functioning of the EU for the benefit of all within it. Many reform ideas have been put forward. For example, the CityUK, of which I am a board member, has set out very clearly the improvements which the UK financial services sector would like to see.

And these concerns are not unique to the UK. Angela Merkel said to German business leaders in November last year:

“I agree that Britain should stay in the European Union…Where there are justified concerns – whether competitiveness or a better functioning of the EU – British concerns are our concerns,”

Clearly, there is much to be negotiated and that political process is underway.

Benefits of being in the EU

Now to the relevance of all of this to us here today.

The London market is currently the largest global hub for commercial and specialty risk – controlling more than £60bn of gross written premium. It is a diverse market made of up over 350 firms contributing over 20% of the City’s GDP and employing 48,000. It has been built on mercantile traditions supporting clients from around the world as they undertake global trade and investment. It has the expertise and the capacity to take risk within a regulatory framework and tax environment that has been attractive to the inward flow of capital.

The UK’s membership of the EU has been part of that success story and we believe that it will be key to our future growth and development as we deal with competition from other insurance centres around the world. This is why we have been so focused on our contingency planning work.

When looked at from the London insurance market’s perspective, UK membership of the EU confers three very important benefits –

it provides us with access to the Single Market;
it encourages Foreign Direct Investment;
and it facilitates trade with countries outside of the EU.
These benefits are, in my view, critical to the success of the London insurance market and its position as the world’s largest specialist insurance and reinsurance centre.

The Single Market

The most important of these benefits is the Single Market.

We say it often enough, hear it often enough, we trade in it every single day without a second’s thought. Let’s face it. We take the existence of the European Single Market for granted.

But what are we taking for granted? Access to a market of over 500 million people. Indeed, the EU is the world’s largest insurance market with a world market share of nearly 33% and total insurance premiums of nearly 1.4 trillion Euros.

Access to this huge insurance market on London’s doorstep, is clearly a matter of some significance to the London insurance market. We would conservatively estimate that the London insurance market writes £6bn of premium income from the EU.

Alongside this we think nothing of hiring in talent from Frankfurt or Amsterdam or Rome, whilst in London we send our talent out to experience the market across Europe – safe in the knowledge we can recruit the very best Europe has to offer.

London’s trading connections with Europe mean that Lloyd’s has always been a European, as well as a British, insurance market. After all, Lloyd’s first chairman, Martin van Mierop, was Dutch.

For pragmatic reasons, Lloyd’s has therefore been a long-term supporter of the UK’s membership of the EU, and the opportunities it provides for cross-border trade. The Corporation of Lloyd’s established a “Common Market Secretariat” in 1967, well before the UK had joined what was then referred to as the Common Market. In June 1971, as negotiations on possible UK membership progressed, Lloyd’s Chairman said:

“Lloyd’s can only be in favour of the greater freedoms to trade within Europe laid down in the Treaty of Rome”

Today, the single insurance market, confirmed in the Solvency II regime, means that Lloyd’s underwriters are able to write insurance and reinsurance from all of the other 27 Member States on a cross-border basis and also locally in those countries in which we have branches.

We operate under a passport system. Our passport permission to trade is granted by the PRA and allows us to establish branches in other Member States. The PRA also has exclusive responsibility for prudential supervision of Lloyd’s within the EU. It follows that we are not required to localise any funds in other EU jurisdictions to meet liabilities nor do we have to make local reports to other EU supervisors under EU law.

The EU Single Market therefore facilitates the efficient deployment of our capital and explicitly authorises the use of letters of credit and bank guarantees as eligible regulatory capital.

Overall this model is, in many ways, the optimal international regulatory regime for Lloyd’s and other London Market firms. Indeed, we wish that countries outside of the EU placed the same degree of reliance on our Home State prudential supervision as EU member states are required to do.

Of course, this system of regulation which facilitates access to other EU Member States comes at a price and that price has gone up recently. I am of course talking about Solvency II. We know that its regulatory requirements are formidable and it is far from perfect.

But let us not forget that UK regulators were at the EU table when the Solvency II regime was designed. Indeed the regime is built on regulatory concepts which our own regulators have supported and advocated. Nor should we forget that, throughout the lengthy implementation process, UK insurers have been firm supporters of the principles behind the Solvency II regime, even when they have criticised the way that those principles have been put into effect.

This influence continues today and it was good to see in the Financial Times on Monday that the UK Treasury and the PRA aim to be at the EU table to refine the way in which Solvency II has been implemented to reduce its negative impact on long term investment and on the competitiveness of the sector.

The single market provides benefits to the whole London market, as well as to Lloyd’s.

I note that of the International Underwriting Association’s 50 members, just four are UK entities. Twelve are branches of EU insurers, 35 are subsidiaries of groups headquartered in third countries and 9 are branches of third country insurers.

We also appreciate that it is the brokers that make our market work. The Single Insurance Market benefits them as well as carriers as they operate throughout the EU on the basis of Home State passports and exclusive Home State prudential supervision. It works to the advantage of London Market insurers and reinsurers that brokers can leverage the access the single market provides to both carriers and brokers to enable business from across the EU to flow to London. In short, the single market is vital to London’s ability to service its global clients. It is therefore understandable that the British Insurance Brokers’ Association has put Brexit at the top of their agenda this year.


We know that the London market and UK economy as a whole has changed beyond recognition in the last few decades, as investment from overseas has increased.

London is seen as an attractive destination for those who wish to invest in our market or other parts of the economy. The investment is attracted by a wealth of features – our economy, skills, and taxation system. However, we should not underestimate the importance of being able to access the single market for all the reasons I have highlighted. For some businesses, it is a key reason for locating in here.

The UK attracts more FDI than any other EU member state, and financial services attracts more than any other sector. Lloyd’s capital base is a testament to that attractiveness given that most of our capital comes from outside the UK.

And I am very clear that for Lloyd’s, further diversification is essential. If we want to retain our position as the hub of global insurance and reinsurance, it is because we can offer the best of all worlds in terms of London and single market access. That will be key part of why international insurers and reinsurers from emerging markets will pursue their diversification strategy through London and Lloyd’s.


Now to trade. Often the debate on the EU focuses on the UK’s relationship with Brussels and the countries within the EU. But that is too narrow a view and we must also consider how the EU, and therefore the UK is able to look out and interact with the wider world.

Trade agreements between countries are a key tool for boosting trade and removing barriers to the conduct of business worldwide. Within the EU, the European Commission conducts negotiations on trade agreements on behalf of EU member states. The Commission has concluded agreements with 55 countries around the world, and is seeking to complete deals with another 87, including the US through TTIP.

Existing agreements to which the UK is a party via its EU membership cover 59% of the UK’s global trade and this will rise to 88% if the EU is successful in its current trade negotiations. With 90% of global economic growth expected to be generated outside Europe over the next 10-15 years the importance of this trade activity cannot be under-estimated.

The advantages of trade negotiation at EU, rather than individual country, level are that the EU’s size gives it substantial weight in those talks, greater than any country acting on its own. Michael Froman, US Trade Representative, has said:

“I think it is absolutely clear that Britain has a greater voice at the trade table being part of the EU, being part of a larger economic entity.”

The London market benefits from trade agreements in two ways. First of all, there is a direct effect, when an agreement explicitly provides for the opening up of insurance and reinsurance markets. Such provisions are more likely to cover reinsurance and specialist insurance lines. Since these are sectors in which the London market has particular strengths, they are very welcome.

Secondly, there is the wider impact of trade agreements. They open up markets and boost economic activity, thereby stimulating demand for insurance and reinsurance, which the London market is well-placed to meet.

Trade agreements will be an important element in the forthcoming referendum, because those who want Britain to leave the EU argue that, once Britain loses the restrictions imposed by EU membership, it will be able to negotiate better agreements than those reached by the European Commission. has said –

“Leaving the EU would allow Britain to trade more freely with the rest of the world.”

Such views require careful assessment.

Like many financial firms in London, Lloyd’s is a longstanding observer of and contributor to international trade talks. They encompass a wide range of economic activities, often at granular levels of detail. It takes two to negotiate and the parties may have different economic concerns and priorities. Many countries are reluctant to open up their insurance and wider financial markets to outside competition, for example. Reaching meaningful agreements can therefore be immensely difficult and take a very long time indeed.

We must recognise that, if the UK leaves the EU, other countries may show less appetite for making agreements with a UK of 63m customers than they do with an EU of 500m customers. Negotiations to replace EU trade deals would take years, without any guarantee that we would get the same quantity or quality of deals. Moreover, the UK would not jump to the front of the queue – other countries are already busy working on deals, including with the EU.

To quote Michael Froman, US Trade Representative, again:

“We’re not particularly in the market for FTAs with individual countries.”

The bottom line is the UK would have to wait its turn to begin lengthy negotiations with no guaranteed outcome.

A vote to Leave

So what of the forthcoming referendum? The timetable from here hinges on the prospects for the Summit at the end of the week but we know that 23 June has been earmarked as a potential date for the referendum.

Whether it is June or some later date – what would a vote to leave actually mean?

What difference would we see on the day after the vote has been counted and it is declared that Britain will secede from the EU? Could we cope?

We would clearly enter a period of considerable uncertainty. As laid out in the Lisbon Treaty, the formal mechanism for leaving the Union is for the Government to give notice to the Council of the EU, which would be effective two years later unless an extension is agreed.

The Treaty provides for negotiation of a withdrawal agreement. If there were to be a “leave” vote, the UK Government would seek to negotiate an agreement containing transitional measures and covering a framework for its future relations with the EU. This would entail lengthy negotiations, because withdrawal would require the unravelling of countless budgetary, legal, political and finance rules. The unwinding of obligations, rights and relationships that have been built-up over many decades.

Only one country has ever voted to leave the EU: Greenland. A referendum in 1979 produced a “leave” vote, essentially on the single issue of fishing rights. Negotiations on that single issue dragged on for six years, before agreement was reached and Greenland left the EU in 1985. I venture to suggest that the UK and the EU would have a rather larger number of very significant economic and other questions to resolve in the course of any withdrawal process. This makes the timing of an eventual exit impossible to predict.

A vote to withdraw would raise many questions: When would the Government give notice to withdraw? Would the Prime Minster resign? Could it trigger a general election? What would Scotland and other parts of the UK do? What terms of exit would the UK Government negotiate? Would there be a further referendum on those terms? What would be the impact on the economy, the currency and business? These are all difficult questions and we are told the Government currently has no Plan B.

A vote to leave would fuel European financial markets turmoil. IMF managing director, Christine Lagarde takes the view that a potential Brexit would cause turbulence for global financial markets and calls for a swift deal for the good of the European and world economies.

Uncertainty around the timescale of the negotiations between the UK Government and the EU would put Britain in a limbo, making it less attractive to foreign investors.

Even now, in advance of any referendum, the Governor of the Bank of England has warned of financial instability, higher interest rates and capital flight in the event of a vote to leave. If we believe what we read in the newspapers the Bank of England is already building up its foreign exchange reserves.

I am not scaremongering. My job is to assess risk objectively and dispassionately and ensure that we are prepared. If our experience in the Scottish referendum taught us one thing, it is the potential flow of events will lead to more uncertainty for the UK, not less.

A Brexit would create a precedent for EU countries to leave the bloc. Problems within the Eurozone and over migration from outside Europe have led to a surge in euro-scepticism across the Continent. It is quite possible that governments of other member states would come under pressure to follow the UK’s example and to hold referendums on membership. Europe is already under pressure in the Eurozone and with migration. Further instability caused by Brexit could be an unwelcome reality.

So what can we, as businesses, do about this? Given the level of uncertainty we all have to be prepared for all possible scenarios and this is what Lloyd’s has been doing.

In the event of a vote to leave, we would work with the UK Government and EU Institutions during any negotiations to retain market access for Lloyd’s and the London Market and create as much regulatory certainty as possible.

There are alternatives to the UK’s existing relationship with the EU and, as you would expect, we have examined them very closely. Unfortunately, time does not allow me to go through these options other than to say this. There is real uncertainty about what those alternatives might be and what will be politically and practically achievable after a vote to leave. What we do know with certainty, however, is that none of the alternatives will be as beneficial for the London market as the current relationship.

Depending on the circumstances, Lloyd’s will need to take steps to secure the necessary access to EU member states and through our contingency planning work we have been undertaking the necessary research and planning to enable that to happen.

Two things are clear. First, Brexit does not offer a route to insurance regulatory nirvana. The UK regulatory system has been largely driven by domestic political and regulatory concerns since the financial crisis. The Bank of England has made it clear that it will not be held back by Brussels if it feels that UK financial stability requires it to be more conservative and require more capital than EU Directives. The new senior management regime we are all implementing and the new focus on conduct regulation are domestically driven and cannot be blamed on Brussels.

Second, an equivalence finding under Solvency II does not provide a solution. The UK would, under EU parlance, be a “third country” and whilst it may be found to have a regulatory regime that is equivalent to Solvency II – that does not confer a right to access the EU market either on a cross border or on a branch basis.

Lloyd’s has already been working through every eventuality and this is something the Franchise Board and the Council have been particularly focused on and we have been taking the necessary legal advice. For those of you that use the Lloyd’s platform to access European markets, I am confident that, whilst there will be more work to do in the event of a vote to leave, we will be able to find a way through the uncertainty. This will allow business to continue to flow to London but will also continue to offer the opportunity to write business in local markets under the Lloyd’s structure. But we should not kid ourselves – the London market’s access to the EU will not be as good as the access we currently enjoy.


And so to conclude.

As I hope I have highlighted today, a vote to leave will create very real risks and uncertainties that we must be prepared for. It is also, on balance, hard to see that any relationship the UK might have other than membership of a reformed EU offers the London insurance market something that is better than we have today.

Forty-one years ago, a Prime Minister had unexpectedly won a General Election after promising to hold a referendum on EU membership. He made that promise because his Party was split, with some believing that Britain should remain a member and others supporting withdrawal. The referendum took place after a process of negotiation viewed by many as largely a presentational exercise and Cabinet Ministers were given permission to campaign against a “yes” vote.

So far, so familiar.

The result was a vote, by 67% to remain. Lloyd’s comment at the time was as follows:

“The position adopted by London insurers was in no doubt, and the majority vote for continuing membership evoked from the Lloyd’s market feelings of delight, enthusiasm and, above all, relief.”

We wait to see if history will continue to repeat itself.