House of Lords advocates more proportional regulation for London market

In January 2022, the House of Lords’ Industry and Regulators Committee launched an inquiry exploring regulatory issues in the London market, covering both commercial insurance and reinsurance.

This should not be confused with other, broader inquiries into post-Brexit financial services regulation in the UK (see Pass Notes), but these investigations do overlap and can only be understood in the same overall context.

The London market issue

The London market is widely perceived by industry commentators to be unsuited to the ‘one-size-fits-all’ approach currently taken by the UK regulators because it has an unusually international focus.

Therefore, the House of Lords’ committee felt the market needed its own specific inquiry regarding regulation.

Caroline Wagstaff, chief executive of the London Market Group (LMG), said: “London market wholesale brokers, insurers and reinsurers serving corporate clients and other insurance firms are regulated in the same way as a high street broker or insurer offering motor and home insurance to an individual consumer.

“The major challenge for the London market is that capital and expertise is increasingly mobile and other insurance centres are becoming increasingly attractive, resulting in the international insurance market becoming highly competitive.”

This “internationalisation of the market has increased competition among London carriers”, Wagstaff continued, meaning that these firms have to “prove their business case to capital providers instead of relying on the London-based investor’s historic attachment to the London market”.

“The impact of regulation is inevitably a factor in both the perception and the reality of the UK as a place to do business. This is why getting the future regulatory framework right is so important,” she added.

The inquiry findings

The Industry and Regulators Committee heard oral evidence from a number of organisations, including the Prudential Regulation Authority (PRA) and the FCA. It also received written input from other industry stakeholders.

The committee then concluded its work by summarising its findings in a letter sent by its chair, Lord Hollick, on 6 April 2022 to John Glen, economic secretary to the Treasury.

This stated that “it is vital that the concerns regarding the inflexible and sometimes unnecessarily complex processes require a broader reassessment of regulatory culture.

“There is a need for current rules to be applied more proportionately and efficiently”.

Industry bodies that have told Insurance Times that they largely welcome the committee’s findings include the ABI, LMG, Chartered Insurance Institute (CII), Lloyd’s Market Association (LMA), International Underwriting Association and the London and International Insurance Brokers’ Association.

Nevertheless, there are still areas of concern. For example, Lord Hollick’s letter did little to appease those who argue that competitiveness should be a primary objective of the UK’s regulators, rather than a secondary one that follows the priority of overseeing the safety and soundness of firms.

The fact that the letter highlighted how a lack of proportionality in regulation can hinder the development of new forms of insurance in the UK - such as insurance-linked securities (ILS) - because of delays in regulatory processes was particularly welcomed by industry stakeholders.

But, even if changes result here, they will not necessarily prove to be a silver bullet.

Steve Evans, owner and editor-in-chief of news and data media site Artemis.bm, who has tracked the development of the catastrophe bond and ILS market since 1996, stressed that regulators can’t instigate all the change that is needed on their own.

He said: “True innovation for the London and UK insurance and reinsurance market will come when it realises there are more efficient ways to connect risk with capital sources, including using ILS and capital market techniques.

“Right now, there are too many entrenched interests, legacy ways of operating and fees and parties involved.

“Blue-sky thinking around how to modernise the pipeline for moving risk to capital, while leveraging institutional investor appetite for relatively uncorrelated insurance-linked assets, is needed to really move the needle on innovation and benefit the market right the way down to the end consumer.”

The industry implications

The committee’s findings are unlikely to result in anything new being implemented straight away, but - over time - they may help to create a sense of direction.

Matt Connell, director of policy and public affairs at the CII, said: “The House of Lords doesn’t have any executive power, but the regulators and the market must show they have taken account of the findings.

“The [House of] Lords can perhaps think out loud more openly and more radically than government departments, [which] can be a useful think tank for the government.”

Nevertheless, the findings will now form merely one part of the overall post-Brexit financial services regulatory jigsaw.

Arabella Ramage, legal director at the LMA, added: “The next step for the Treasury, having received both Lord Hollick’s letter and responses elsewhere via its own consultation, is to come up with some proposals to implement changes to the [regulatory] framework.

“Everyone is coming together and I’m more optimistic that changes can improve the competitiveness of the UK insurance market.”

In truth, it feels that the House of Lords’ inquiry has done little more than start a debate that will prove to be a major feature this year.

In the words of former prime minister Winston Churchill: “It is not even the beginning of the end. But it is, perhaps, the end of the beginning.”