“Heavy Fog In Channel. Continent Cut Off.” That often quoted newspaper headline, which dates from at least the 1930’s, captures the ambivalent feelings the British have about their European neighbors. Despite seismic changes, there’s still a significant portion of the population of the UK – the Euro sceptics – who are certain Britain could get along just fine without Europe, and want to end its ties to the European Union (EU).
UK voters, with the exception of Scotland, gave the Conservative Party an overall majority in the House of Commons with more than the 326 seats necessary to form a government without a coalition partner. They are projected to end up with 331 seats.
Those voters will now have another choice to make, as Prime Minister David Cameron has promised a referendum in 2017 on maintaining the UK’s EU membership, which will determine once and for all whether it stays or goes.
As a result the UK’s all-important financial services industry, including the re/insurance sector, faces two years of uncertainty. The industry and its extensive contingent of component parts and supporting companies could do without that concern. It needs clarity as to what future economic and political conditions are likely to be, as it must cope with low interest rates, more regulations and higher taxes. Decisions on where to invest capital, on what products and in what markets, are difficult to make when economic and political conditions don’t provide some intimation of what it should be concentrating on.
If the referendum endorses an exit from the EU, it would have an effect on the City of London as Europe’s premier financial center. Currently, if a company is headquartered in London, its membership of the EU permits it to operate in all member countries. Exiting the EU would therefore create a barrier for many businesses, including re/insurers. One only has to look at how Dublin, a backwater before Ireland joined the EU, has profited from membership to induce a number of businesses, headed by re/insurers, to establish substantial operations there.
How realistic is the threat that UK-based financial companies would consider doing likewise? Would all of those insurers, reinsurers, brokers and the lawyers accountants and other enterprises that serve them remain there, if the UK exited the EU?
Most of them probably would remain in London, as the investments they’ve made, such as Willis’s and Aon’s new buildings across from Lloyd’s, indicate a commitment to a long term presence, and the infrastructure is well-entrenched.
There might be less business from Europe, but would the rest of the world, where most developing markets are located, not continue to look to London for insurance to the extent it does now? As long as London-based companies are able to place risks globally, an exit from the EU should be manageable.
Before the UK became a member of the EU’s predecessor the European Economic Community (EEC) its financial businesses, especially re/insurance, were already well established. But economic circumstances made it clear that the UK would probably be better off within the (EEC), rather than remaining outside it. The UK, along with Denmark and Ireland joined in 1973. Although there’s has been some dissension, things have worked out well for both the EU and the UK.
In 1991 with the signature of the Maastricht Treaty the EEC became the EU and subsequently expanded to the present 27 countries. It also created the euro as a common currency in 1998, which became the money used by 11 countries on New Year’s Day 1999. There are now 18 countries in the euro zone, but the UK retains the pound sterling as its national currency.
The complaints surrounding the EU are not just from the British. They mainly focus on the “over-regulation” of all forms of commerce by “Brussels bureaucrats,” who are not elected. While the members of the European Parliament are elected, it has very little actual power; it’s more of a debating society. The real power within the EU is the unelected European Commission [EC], under whose guidance and direction, thousands of pages of regulations pour fourth annually in an attempt to harmonize the rules under which the now 27 EU countries are governed. They can get very specific.
As an example: Lincoln’s Gettysburg address is 272 words; the European Union’s regulations concerning duck eggs in English contain over 1300 words. As the above headline indicates, the British have always felt that, although they are contiguous with Europe, they aren’t really a part of it, and especially don’t like the EC telling them what to do. They don’t like having to measure things in kilos, grams, meters or kilometers.
The role of the re/insurance industry is significant, as it, along with the banks, are a vital part of the UK’s financial services industry. London’s insurance presence goes back a long way. The industry began there at Edward Lloyd’s Coffee House in 1688. It was followed by the establishment of proto insurance companies in 1710, after the great fire of 1688.
One can still occasionally find the “fire marks,” or “fire insurance plaques,” used by these companies to indicate where private fire services were provided for their customers in putting out fires in the days before municipal fire departments were organized. The Chartered Insurance Institute has collected more than 2000 of them.
The UK’s early prominence in the insurance industry also reflects the dominance of the British Empire throughout the world from the end of the Napoleonic Wars until the economic upheavals caused by the wars of the 20th century. The growth in the use of English as the language of commerce, which has been carried on by the U.S., dates from this time.
English and some Scottish companies wrote coverage all over the world for the businesses and people in the British Empire, and for the marine transportation system that serviced it. Despite Britain’s economic decline after the wars, those institutions largely remained in place, giving London a head start on resurrecting the insurance business disrupted by World War II.
London is also ideally situated in a time zone that can converse with Asia in the morning and the U.S. in the afternoon. With the advent of instant 24 hour communications this may have become less important, but for roughly 40 years it was a crucial advantage, and cemented the City’s place as the premier global insurance hub. Once the installations were in place, they stayed there, and other re/insurers came to join them.
Swiss Re didn’t build the iconic “Gherkin” because it liked the weather. Even if it no longer owns the building, it still conducts a significant amount of business from it. Other buildings – like the “Walkie-Talkie” and the “Cheese Grater,” were built in the City of London precisely because it continues to be a major center for re/insurance industry.
Walking around EC3 – the City’s most notable postal code – you see the names of company after company – from the UK certainly, but also from the U.S., Bermuda, Japan, Australia, Canada, most European countries, and now China, the Middle East, Africa and South America. They’re all there because that’s where the business is, and where most of them would probably remain, even if the UK left the EU.
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