The City of London is just emerging from the recession brought on by the financial crisis, but it’s “clear there are numerous challenges ahead if it is to retain its global importance as a center for financial services,” warns Lloyd’s. This holds true for the City’s insurance market as well.
A key element for a successful recovery is seen in the new UK government’s “pledge to lower the level of corporation tax and a proportional approach to regulation.”
An ongoing concern is the looming adoption of Solvency II, Europe’s new regulatory regime for the insurance industry; the details of which are currently being tested and discussed. Groups representing insurance interests are lobbying to ensure the industry will not be subject to an unnecessary burden.
“The tax environment is quite an important one. Solvency II is important but its consistent implementation across Europe is essential, otherwise the London market could be put at a cost disadvantage,” explained Tim Leggett, a partner in the financial services practice at Ernst & Young.
While the insurance industry came through the downturn with balance sheets largely intact, there is a concern that a knee-jerk reaction to the banking crisis by regulators could have ramifications for insurers.
“We do recognize a lot of the discussion at the moment is around increased regulation, particularly in response to the banking sector, and so we need to push back with the regulators and stress the difference between insurance and banking and ensure that any new regulation is proportionate for our business,” added Lloyd’s CEO Richard Ward in a recent interview with Bloomberg.
As Lloyd’s Chairman Lord Levene recently pointed out “overregulation” is a potential disaster for the London market, which has always been more freewheeling, and a good deal more innovative, than markets elsewhere in Europe. Leggett questioned whether London’s insurance industry really needs any new regulations, pointing out that it had “survived the credit crunch and aftermath extremely well.”
He added that maintaining a competitive edge in the future is a key challenge for the London market, as its “infrastructure provides an advantage over a number of other places, including the fact that the brokers, lawyers and loss adjusters and various centers of expertise are here.”
The City is also worried about losing business to other countries with lower taxes as well as the impending regulatory reforms. A number of insurers, formerly based in London, have recently opted to move to places like Dublin or Zurich, as well as Bermuda.
Lloyd’s has lobbied the government to consider a lower rate, believing it will help London retain and attract more business. It may have achieved results. The article points out that in its “2010 Budget, the new Coalition Government announced it would lower the rate of corporation tax from 28 percent to 24 percent. The chancellor George Osborne told MPs: “Corporation tax rates are compared around the world, and low rates act as adverts for the countries that introduce them… Our current rate of 28 percent is looking less and less competitive.”
In addition to lowering the rates, the insurance community is also seeking “changes to how overseas branches or subsidiaries of UK companies are taxed, which “could prove more significant in helping to retain the parent companies of UK conglomerates,” according to Jeff Soar, partner in the financial services practice at Ernst & Young.
“London has got a hugely important group of people based here who have grown up through the market and have always been London-based, so there is a desire to stay here if possible. But it gets to the point where you do need to think about your shareholders and do something around competitiveness,” he stated. “People will be looking around because of that but if we can have change in tax legislation soon we will see less people moving out from London.”
Source: Lloyd’s of London
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