Insurance Jottings

Analysis: A Divided London? City Tackles Brexit With Twin-Track Finance Revamp

High in the skyscrapers which have taken root in its warren of medieval streets, City of London grandees are plotting a post-Brexit regulatory revamp to rival New York.

And with little sign of that changing, Britain is now rewriting inherited EU laws which typically combined retail and wholesale markets, making them cumbersome to amend quickly.

What has emerged is a twin-track approach, with a new chapter of flexibility for wholesale financial trading alongside attempts to toughen protection for consumers.

Although Brexit delivered less of a hit than initially feared and London has consistently remained the second largest global financial centre after New York, it cannot rest on its laurels.

So far it has set out reforms to ease share listing and trade reporting rules, tweak insurance regulation and scrap curbs on the anonymised share trading favoured by big investors.

At the same time, London is looking to toughen the ‘duty of care’ on banks selling pensions or home loans after a string of mis-selling scandals and an expected rise in consumer confusion over financial products in the wake of the coronavirus pandemic.

“We have all become used to a regulatory pendulum that swings one way or the other, but at the moment there are two – a wholesale one and a retail one,” Chris Woolard, who was interim CEO of the Financial Conduct Authority last year, told Reuters

“We are seeing the removal of frictions but in retail, a continued tough – and in some cases, tightening – stance on consumer protection,” Mr Woolard added, who is now EMEIA financial services regulation leader at consultants EY.

Wholesale Change

Wholesale finance became a priority after billions of euros in share trading left the City for Amsterdam in January, while the British capital continues to lag New York in tech listings.

“The UK Treasury and Financial Conduct Authority have created an environment in the UK where you can trade European stocks in a more open way that markets want to trade in,” Michael Horan, director and head of trading in EMEA for BNY Mellon’s Pershing, told Reuters.

While Jack Inglis, CEO of hedge fund industry body AIMA, said the aim was to simplify rules and not resort to light-touch regulation or competing on tax incentives, the developments in London are being closely watched in Brussels.

Conor Lawlor, director for capital market and wholesale at banking body UK Finance, said reforms proposed so far can add up to more than tweaking around the edges if fully implemented.

“Many of the suggested proposals in the wholesale market review represent proposals the industry has put forward to government,” Mr Lawlor said.

Britain’s finance ministry said it has set out a comprehensive roadmap and was already delivering a more open, greener, and technologically advanced financial sector.

“Coordination will be crucial to drive through reforms, and help firms plan for the future,” the

ministry said, adding that its “grid” of upcoming rules will help achieve this.

Existential Risk

“It’s a surprisingly ambitious agenda – they have grasped that London, and the UK, will generally need to fight for its global position,” Jonathan Herbst, global head of financial regulation at Norton Rose Fulbright law firm, said.

Bespoke rules for professional investors would become a “really important differentiator,” Kay Swinburne, vice chair of financial services at KPMG and a former member of the European Parliament, added.

While regulation is a big part of the overall drive towards financial competitiveness, UK Finance’s Lawlor said that the tax regime also needed to be competitive and UK-based firms needed access to global talent.

“If you can turn the dial on all three of those variables the UK will give itself the greatest chance of strengthening its competitive footing,” Mr Lawlor said.

Bespoke capital requirements for wholesale banks would also help, an international banker added.

Alasdair Haynes, CEO of Aquis Exchange, said the pieces for improving wholesale markets were on the table.

“What worries me is can we actually get that jigsaw put together. To do that you need one body, be it the Treasury or a regulator, focusing on it – it has to be joined up and executed,” Mr Haynes said.

For some a key piece is still missing. Daniel Hodson, former CEO of the LIFFE futures exchange and campaigner for Brexit, said a central bank digital currency for making payments in the wholesale market must be the priority.

The Bank of England has yet to make a decision on this.

“If you don’t do this and let the continentals get ahead, then they will start to undermine the cement … which is clearing, settlement and transactions,” Mr Hodson said.

“If that starts unravelling, then you are going to start seeing the decision-makers going and it’s really an existential risk,” he added.

The City, as London’s traditional financial heartland is known, has retained little direct access to the European Union financial market since Britain fully left the bloc in December.

Insurers Need to Accelerate Exit From Oil & Gas Industry to Meet Climate Goals: Report

Article from the Insurance Journal

For the insurance industry to fulfil its stated commitment to combat climate change, it may want to accelerate its efforts to exit the oil and gas industry.

To date, just one insurer has promised to take “significant action” in this regard, according to analysts at Société Générale SA. Australia’s Suncorp was the first to announce it would no longer provide coverage for all new oil and gas production projects.

While insurers (23 in all) have moved to end their underwriting of coal-related activities, they have been slow to act on oil and gas. That’s mainly because the insurance market for those fossil fuels is considerably larger, with estimated premiums of more than US$17 billion in 2018, compared with US$6 billion for coal power, said Peter Bosshard, programme director at the Sunrise Project and global coordinator of Insure Our Future (IOF).

Reducing exposure to oil and gas has to be the next environmental objective for the insurance industry, said Nick Holmes, the London-based head of the insurance research team at SocGen.

Oil and gas accounts for 55% of all global carbon dioxide emissions unrelated to land-use such as deforestation, compared with 40% for coal, according to a group called Global Carbon Atlas.

The United Nations’ Intergovernmental Panel on Climate Change has said oil and gas operations must be reduced to meet the Paris Agreement’s target of limiting global warming to 1.5° Celsius by 2050. Yet governments still plan to expand oil production by 20% over the next two decades.

Oil Change International has said that CO2 emissions from existing oil, gas and coal fields and mines are likely to push the world far beyond 1.5°C unless urgent action to restrict oil and gas growth is taken.

For insurers, “we feel momentum is starting to gather in this area,” Mr Holmes said. The floods last month in central Europe caused about €6.5 billion (US$7.6 billion) of damage, making clear that insurers have a vested interest to combat climate change, he said.

The oil and gas part of the insurance market is highly concentrated in about ten companies, including American International Group Inc, Travelers Companies and Zurich Insurance Group AG.

The ten companies account for about 70% of total underwriting, according to the IOF environmental non-profit.

Insurers can have a huge impact on the oil and gas industry by refusing to provide coverage for the very worst aspects of the industry when it comes to atmospheric and environmental destruction – oil and tar sands, oil shale and Arctic drilling – and by refusing to insure new projects, the SocGen analysts wrote in their 26-page report entitled “Insurance ESG Big Picture.”

Premiums from insuring new oil and gas projects amounted to about US$1.7 billion in 2018, which equals just 0.1% of all property and casualty premiums. This means the financial impact on insurers from restricting coverage for new capacity wouldn’t be very significant.

In other words, insurers can afford to drop the world’s biggest perpetrators of climate catastrophe, but choose not to.

Companies such as AXA SA and Assicurazioni Generali SpA have begun to restrict insurance for oil sands, oil shale and Arctic drilling. Insurers who take decisive measures should become more eligible for what the SocGen analysts call a higher “green valuation premium.”

European insurers have shown their desire to combat global warming by exiting coal insurance and coal-related investments. Today, most of the major European insurers and reinsurers won’t touch new coal projects and have established clear roadmaps to fully exit coal. Consequently, coal companies are finding it more difficult and expensive to find coverage, with many reportedly facing rate increases of as much as 40%, according to the SocGen analysts.

The analysts give France’s AXA and Swiss Re AG the highest environmental, social and governance ratings of the 14 European companies in their report, and they say restricting oil and gas would add to the “ESG premium” for all insurers.

AXA was among the industry’s first to announce restrictions around exposure to oil sands and Arctic drilling, and Swiss Re has said it will cut insurance services for the world’s most carbon-intensive oil and gas producers by 2023.

“We think ESG investors should recognise this with a ‘green’ valuation premium,” Mr Holmes said.

The SocGen analysts have determined that an insurer’s position on ESG-related underwriting and investments can have an effect on its valuation ranging from -3% to +9%, mainly driven by environmental factors such as exiting coal. Using this system, the bank’s analysts raised their target price for AXA and Swiss Re by 6%, and their target price for Generali, Zurich, Allianz SE and Munich Re by 5%.

Some insurers deserve credit for increasing their investments in the “green” economy, Mr Holmes said. Most European insurers and reinsurers, led by Allianz and AXA, boosted their green investments by 20% to 30% in 2020. AXA plans to raise its green holdings to €25 billion by 2023 from €16 billion at the end of last year.

In July, eight European firms established the Net-Zero Insurance Alliance, which includes measurable and science-based climate targets that will be monitored and updated every five years.

The insurance alliance “aims to be a high-ambition group, which is positive,” Peter Bosshard said. “But if the members want to follow the science and show credible ambition, they have to stop insuring new oil and gas projects.

The new SocGen report finds that doing so will also be in their financial self-interest.