As Lloyd’s of London opens an office in Brussels to ensure it has a post-Brexit presence on the Continent, what are the implications for London’s insurance market?
Insurance companies know a thing or two about “downside” risks. It goes with the territory. So in the wake of the Brexit referendum, this can surely only mean one thing: imagine the worst case scenario; legislate for something even worse.
UK-based insurers have already begun looking again at their UK operations. At least 20 of them have announced they are opening new offices on the Continent, where licensing restrictions could prevent them from trading post-Brexit, and property consultancies are pitching for new mandates to advise on the future size and shape of their companies.
Most prominent among them is insurance marketplace Lloyd’s of London, whose presence in the City underpins the huge cluster of insurers located there. The body recently failed to get the government to guarantee future “passporting” rights, which currently allow UK insurers to serve EU customers from London.
Now, Lloyd’s is opening a new Brussels office, and further insurers are expected to follow suit.
“We are definitely seeing a rise in enquiries from insurers looking at their UK occupancy needs post-Brexit,” says Shelley Frost, head of consulting at JLL. She confirms that her firm has been taking part in increasing numbers of confidential pitches to support insurance companies in a post-Brexit world.
What is the downside risk?
The government’s Brexit White Paper recognises the economic contribution played by London’s insurance industry, centred on Lloyd’s of London. The export-driven business contributes more than £60bn to the economy and its future success will likely be determined by its ability to expand into new markets, rather than focus on domestic ones.
Risk-averse London-based insurance companies are hoping to galvanise themselves against the effect on this that an isolationist “hard” Brexit could have. US insurance giant Chubb, for example, last month announced it would move its EU headquarters to Paris. Others are hoping to open in Dublin, Frankfurt, Luxembourg or Munich.
Few have been clear about how many staff they might actually have on the Continent, however. The EU insurance watchdog, the European Insurance and Occupational Pensions Authority, has warned that insurers looking to conduct business in the EU will need more than just a token presence there.
Lloyd’s has pledged to have at least 20 people in Brussels, but few others have made equally firm commitments.
It would be easy to question why, given the as-yet unclear outcomes from the Brexit negotiations, insurers would feel the need to move so quickly. According to City of London trade body TheCityUK, persuading the EU watchdog to provide a new licence could take a company between one and two years. So there is a race to secure licences before 20 March 2019, after which existing insurance policies could be invalidated.
TheCityUK has set up an international regulatory strategy group that is lobbying the government for a fixed term over which insurers will be able to continue to service their clients. In the absence of this though, the potential downside risk for insurers is stark: without policies in place before 20 March 2019, a huge chunk of business could be lost.
Implications for UK property
Aon head of EMEA corporate real estate Paul Crayford, who oversees the European portfolio of one of the City’s largest insurers, says that although Brexit has accelerated certain plans, a UK rationalisation exercise was already taking place in his organisation.
Consolidation in the sector and technological advances were already prompting Aon and its peers to rationalise their UK operations.
Crayford makes clear that Aon, which is advised globally on its strategy by PwC, has offices in locations such as Amsterdam and is reducing its City presence to purely client-facing roles. The “mid-office” roles are being slowly moved outside the M25, and 500-1,000 roles will ultimately be moved offshore.
He is cautionary about overstating the effects of Brexit. “I thought the implications [of Brexit] were going to be far more wide-reaching than they were. We are already set up in Europe, but I see others in the financial network setting up.
“The major movement of personnel is pure transactional roles, and in the next five years, you will see a lot more skilled entities moving services out to Paris or Marseille, for example.”
The company occupies 200,000 sq ft in the City and has decreased this by around 35% over the past five years. It had an option to take further space in the Leadenhall Building, EC3, but chose not to.
Anecdotally, other insurers are following suit. In 2013, insurers signed for more than 560,000 sq ft of new London office space, according to Deloitte Real Estate. That fell to 116,000 sq ft in 2016. A wave of mergers and acquisitions in the sector has made the specialist insurers more efficient, less space-intensive and fewer in number.
These headwinds against the City can only accelerate in the wake of Brexit. A senior agent says: “Net absorption in this sector will be at best flat, or could be negative – it all depends on what sort of presence you need in the EU.”
The optimists’ view
Optimists are keen to point out, however, that jobs abroad are more likely to be created than moved wholesale.
Chris Vydra, executive director in the City leasing team at CBRE, suggests a “tiny number” of firms will be affected and points out that the EC3-focused companies serve a global market, not just the EU. He says London’s insurance industry is much more likely to be negatively affected by a natural disaster, for example.
Good news came in July when insurance firm Hyperion put more than 100,000 sq ft of space under offer at Helical and HHOOP’s 273,000 sq ft Creechurch Place scheme in the City, which completed in April last year.
Other developers remain cautious in EC3 – TH Real Estate last July put its 90,000 sq ft 40 Leadenhall Street scheme on hold in the wake of the referendum, and is waiting it out for a prelet.
No one expects an exodus of insurers. A spokesman for Lloyd’s of London says that although firms are taking steps to ensure they have an EU presence, “people will maintain a presence in London because you have that micro-climate around our building”.
Given the diffuse nature of the various locations being chosen for new EU offices, no one area is presenting itself as a competing cluster. That said, Lloyd’s decision to open in Brussels next year could be viewed as a symbolic shift in the UK insurance sector’s centre of gravity.
