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Insurers wary of consequences if Britain exits European Union

June vote could hit strategies of U.S., Bermuda carriers

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Insurers wary of consequences if Britain exits European Union

A vote in favor of Britain leaving the European Union could profoundly affect the London insurance market and put billions of dollars in premiums at risk.

If voters in the June 23 binding referendum opt to leave the European Union, insurers — including those from the United States, Bermuda and Japan that have U.K. operations — could lose their ability to write business throughout the E.U. using so-called “passporting” rights they gain by reporting only to their home regulator, experts say.

U.K. Prime Minister David Cameron, who supports staying in the E.U., announced the referendum earlier this month. Voters will be asked if they favor staying in the E.U. or leaving it.

Last week, more than 200 U.K. businesses signed an open letter published in Britain's The Times newspaper in support of Britain remaining in the E.U. trading and political bloc. They said jobs could be at risk if Britain exits the E.U. in a move known as “Brexit.”

RSA Insurance Group P.L.C., one of the largest company market insurers in London, was among signatories of the letter published in the newspaper.

While Mr. Cameron favors staying in the E.U. — albeit with certain concessions, such as a limit he negotiated this month on the benefits that migrants can claim —major politicians have criticized the E.U. for burdensome regulation and a lack of accountability.

Regulations such as the Solvency II risk-based capital rules for insurers and reinsurers that went into effect Jan. 1 are made at the E.U. level and then transposed into national laws.

John Nelson, chairman of Lloyd's, has publicly voiced his desire for the United Kingdom to remain within the E.U. and was one of the signatories to the letter to The Times.

In a speech to the Insurance Institute of London earlier this month, Sean McGovern, Lloyd's chief risk officer and general counsel, said the London market has contingency plans in place to enable Lloyd's to continue providing insurance coverage should voters decide to leave the E.U.

“(I) know that the E.U. is not perfect,” Mr. McGovern said, but being part of the bloc confers three “very important benefits” for the London insurance market: It provides access to the single market, encourages foreign direct investment and facilitates trade with countries outside the E.U., he said.

“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 center,” Mr. McGovern said. The current model “is, in many ways, the optimal international regulatory regime for Lloyd's and other London market firms.”

Mr. McGovern said that as a conservative estimate, the London insurance market currently writes about £6 billion ($8.67 billion) of premium volume from the E.U.

The International Underwriting Association, which represents London company market insurers, is surveying its members on a potential Brexit.

A spokesman said since IUA companies comprise a variety of different legal entities, views are expected to differ.

“The main impact on the London company market of a U.K. exit from the E.U., however, would be the potential loss of passporting rights for insurers,” the spokesman said.

He added in an email: “If the U.K. were to exit, (insurers and reinsurers) from third countries such as the United States and Japan, might be obliged to choose other European centers over London in order to passport into the E.U.”

TheCityUK, a lobbying organization that represents financial and professional services companies, said last week said that it was not its place to tell people how to vote in the June 23 referendum, but also said leaving the E.U could cost jobs and stunt economic growth.

“London is the E.U.'s financial center and the strong business links across the continent are fundamental to the prosperity of the whole region,” Chris Cummings, CEO of TheCityUK, said in a statement.

Leaving the E.U. would “create prolonged uncertainty for business while the practical implications of a withdrawal are put in place,” he said. “Not least would be the challenging negotiations to agree how the U.K. could maintain access to the E.U.'s single market.”