Joining 55 other business leaders in signing an open letter to the Times, Lloyd’s Chairman John Nelson offered his support to the Prime Minister’s strategy of UK negotiating a new relationship with EU and then backing it by a referendum. In returning the favour to David Cameron who himself took time to launch Vision 2025 at Lloyd’s last summer, the Chairman is tapping into growing resentment about how the European regulators are handling the introduction of Solvency II across the member states. According to The Independent; the British insurance industry has spent more than £3 billion in preparation for the implementation of the new rules and with no date yet set for their introduction, a challenge to the perceived culture of “red tape”, central to the current Europe debate, is bound to be popular.
Whilst reforming the EU institutions has broad appeal, Cameron’s strategy to tackle it, criticised by Richard Branson and Martin Sorrell amongst others, is nevertheless controversial. Holding a referendum could create uncertainty that may endanger economic recovery with potentially dangerous consequences if renegotiation with our partners ultimately leads nowhere for UK other than to the exit door from the single market.
Since the EU insurance directives were passed in 1992, all European companies have been free to trade cross-border and set up operations in each other’s markets. Firms like Axa, Generali and Allianz have built strong global businesses by successfully executing a pan European strategy. These three companies now have the highest insurance brand value in the world according to consultants Brand-Finance. Yet in contrast over the past two decades UK flag carriers, RSA and Aviva have made very little headway on the continent where they remain low profile.
Lloyd’s efforts have hardly been better. Two of its most adept insurers, Hiscox and Catlin are grinding away in Germany and France but have yet to produce a truly significant profit stream. Amlin is just emerging from a testing period of integration and re-underwriting following its difficult acquisition of Dutch owned Fortis. Although 18% of Lloyd’s premium volume is generated in EU, this figure should be substantially greater if only to reflect the relative size of the European market in relation to the rest of the world, let alone its proximity to UK and ease of doing business there.
That British insurers have not cashed in on the opportunity that the single market provides, unlike most of their European counterparts, is not because of EU bureaucracy or red-tape. Spoilt by the historic position of the London Market and its association with North America, UK firms have simply failed to adapt to the business culture, trading style, buying patterns and linguistic differences prevalent in Europe. An attitude endemic in senior management is that Europe should really conform to how UK operates, and not the other way round. Unfortunately London-based insurers are discovering that European buyers can mostly cope fine without them. More worrying still, as he sets out to redefine the country’s relationship with the rest of the Continent, Mr. Cameron may similarly find that our fellow member states of EU also need UK a lot less than we need them.
Roger Bickmore 
The thing I find hard is persuading people that different doesn’t always mean better or worse – sometimes things are just different (tacit renewal is a perfect example or driving on the other side of the road!). Also, in a way our willingness in London to innovate and change can sometimes be a negative in Europe because sometimes the best thing to do is go with the flow and just do what everyone else is doing – at least initially until you know how the land lies.
The other thing I think we forget in Europe is the importance of allies – David Cameron take note – EU markets are far more collaborative than the UK and if the big guns don’t like what you are doing they can generally stop you! Building relationships takes time.
Torquil touches on one of the key issues in his response: the UK’s voice is no longer taken seriously in European negotiations, whether they relate to insurance or other things. We have done things wrong diplomatically in the Brussels context for so long that we no longer have any allies.
The sad thing is that often we are right, as an industry at least. What goes wrong is how we negotiate in Brussels and how our regulator implements what is decided there: Solvency 2 is a catastrophe, as was our implementation of the Insurance Mediation Directive (“IMD1”). In the latter case if you remember, John Tiner, head of the FSA at the time, said “this is one of the worst directives ever to come out of Brussels”. Actually it wasn’t, it was a good directive, which the French and the Germans implemented well. But in our rush to be the first to implement and to show our credentials as tough regulators, the FSA “gold-plated” it and the end result was a disaster for insurance broking in the UK, to be corrected, too late, by the Davidson Review. It still costs UK intermediaries 3-5% of their revenues to comply, against 0.5% for the next largest European member state. And that is useless spend, either just form-filling, or paying compensation to the customers of banks (PPI etc), who shouldn’t be advising on/selling insurance anyway.
Solvency 2 is the same: the FSA has rushed to show its muscle by forcing UK insurers to ultra-comply before any other member state, and what has happened? The UK industry has spent at least £3 billion (probably more like £5 billion), only to find that the whole vast project has been put on the back-burner because it doesn’t suit the German life insurers.
So one of our European problems lies in the conflictual relationship between the UK regulator and the UK industry – can you see the French regulator implementing legislation which did not suit the French insurance business?
The other problem, as Torquil hints, is that we don’t know what we want out of Brussels. We send the wrong people: no languages, no European culture, no political or commercial weight behind them. One of my distinguished ex-colleagues earned the right to represent his profession in Brussels by rising to the top of his trade organisation, but once on the Continent started every sentence: “In the UK we…”.
We must learn as an industry to devote time and effort to Brussels, and to speak with one voice, insurers, intermediaries and the regulator. If we can’t do that, and so far we have not been able to, then the only solution is Cameron’s. But if we are to take the “out” route, we have to do it properly: we need to be a large Singapore sitting off the mainland, genuinely low-cost, low-tax, light touch regulation, forcing Europe to be more competitive. When I started my career, that’s what we were in London – we had no access to Europe other than via reinsurance, yet such were our tax advantages that we were able to hold a large book of European business even on low margins.
AXA, Allianz and Generali are the brands who dominate because they have adapted to each market as it is, have taken the long-term view and have played the Brussels card well (Allianz has a full-time lobby office in Brussels, in addition to the German trade association). UK insurers have been too focused on short-term returns – RSA came out of much of Europe and unsurprisingly finds it hard to get back. We must look to the longer term – as we know from the business we have together, some classes in some countries can be difficult, but then 10 years later they produce substantial profit – the key is to still be there and to have the right long-term relationships with the right people. For that you need deep local knowledge and a brand which local underwriters are proud to represent. Fortunately that is still the case for Lloyd’s. Most of all we need appropriate and low-cost regulation, making our industry competitive.
One final reflection – general insurance (non-life) is different, both for intermediaries and for insurers. It is a low-risk, non-system threatening business, which has self-regulated with relative success for centuries. It is not life insurance with investment, nor financial advice, and especially it is not banking. It does not require suffocating and expensive regulation, and should not be regulated under the general heading of financial services. It does not require the full extent of the FSA handbook. The latest attempt to rework Intermediary regulation (IMD2) will cost intermediaries €1 billion at least to bring general insurance into line with Mifid and the regulation of banks and investment advisers. This is a waste of money, and as John Nelson and the other 50 signatories said, will simply make Europe less competitive. But no-one in Europe will listen to us saying it.
Maybe the only solution is Cameron’s.