Lloyd’s Plans for Post-Brexit Subsidiary

Just one day after the U.K. set in motion its process for withdrawal from the European Union by triggering Article 50, Lloyd’s announced it was establishing a subsidiary in Brussels, intending to be able to write EU business for the Jan. 1, 2019, renewal season.

The new company will write risks from all 27 European Union countries and three European Economic Area states once Brexit is completed. Because Britain remains a full member of the EU for at least two more years, there will be no immediate impact on existing policies, renewals or new policies, including multi-year policies written during this period of time, the insurer said. The Brussels subsidiary will have its own board of directors and, unlike some banks that have said they will move hundreds of employees to the EU, it will only employ dozens of staff in areas such as information technology and compliance.

Hank Watkins, president of Lloyd’s North America spoke to Risk Management about the company’s plans and the why it chose Belgium as its new location.

RM: How did the process of finding a new EU base begin?

Watkins: Within a week or two of [the Brexit vote] last June, Lloyd’s was on its way, looking across Europe for a new domicile, if you will, for our European business. We are not moving out of London—what we have done is set up an insurance company in Brussels, purely to allow us to passport around the European Union. Because we are not necessarily confident that the U.K. will be able to negotiate passporting rights with the other countries, we are assuming they are not. If they are ultimately successful, then we will just close up and go back home, but that probably will not be the case.

RM: How will the subsidiary work?

Watkins: If you are a policyholder with Lloyd’s, where you previously would have received a policy with all of the syndicates subscribed to it, and that would have been stamped by each of those syndicates, you will also receive an identical policy for the European exposures. It will have the Lloyd’s insurance company name on it and the syndicate stamp of that insurance company and the Lloyd’s syndicates. It is just a little more paperwork for us. The policy is the same—it does not change coverage and it does not change pricing—It is more of an administrative effort to align with what the regulator expects. And our ratings are not affected, we are still S&P-, AM Best- and Fitch-rated A or better and the central fund is still very strong.

RM: Why Belgium?

Watkins: We found a regulator there who is allowing us basically to cede 100% of the premium and the risk back to the syndicate in London. Every other country has some variation of wanting to maintain part of the risk in their country but that does not work for us. So Belgium is a very strong regulator centered in the heart of Europe and a great talent pool as we build out the platform—which won’t be that large, by the way, because we are not necessarily moving people there.

RM: How will insureds be impacted?

Watkins: Companies with no risks in the European Union will see no impact, and it will be seamless for international companies with risks in the EU. Also, it is probably not as well known, but because we are not just large, commercial risks, we do insure a lot of homeowners on the coastlines and a number of private yachts and aircraft, so this is a way to seamlessly include coverage for them in Europe as well.

More Insurers Opting to Form EU Subsidiaries

A growing list of insurers are choosing to form subsidiaries in the European Union to ensure continuous coverage for their European clients following the United Kingdom’s withdrawal from the EU in June 2016. They wish to protect themselves in case Brexit impacts their ability to sell insurance policies and products across the EU from bases in Britain.

FM Global recently announced it is opening an office in Luxembourg, noting that the license allows it to “continue to deliver seamless insurance coverage to its policyholders” throughout the European Economic Area (EEA), where it has operated for more than 50 years.

“We chose Luxembourg as our EEA hub because it’s a multinational business-friendly financial center with regulatory expertise that enables us to remain true to our mutual insurance company business model,” Chris Johnson, executive vice president who will serve as its managing director said in a statement. “Most notably, Luxembourg is a hub that permits EU passporting—which fits our business model perfectly.”

Lloyd’s said in March it will establish an EU base in Brussels that will allow its markets to continue to write risks from all 27 EU and three European Economic Area states post-Brexit. “It is important that we are able to provide the market and customers with an effective solution that means business can carry on without interruption when the U.K. leaves the EU,” Lloyd’s Chief Executive Inga Beale said in a statement. She added that Brussels met the critical elements of providing a robust regulatory framework in a central location.

Lloyd’s said its intention is to be ready to write business for the Jan. 1, 2019, renewal season.

U.S. insurer AIG also announced recently that it is moving its headquarters from London to Luxembourg; and Lloyd’s insurer Hiscox said in May that it has decided to establish a subsidiary in Luxembourg, after debating between Luxembourg and Malta.

Luxembourg has said that as well as insurers, it is in talks with firms including asset managers, banks and financial tech companies.

Large Venues Reviewing Security Measures

Venues that attract crowds, such as large sports events and concerts are reviewing their security measures, both inside and out, to prevent an attack such as the suicide bombing after an Ariana Grande concert in Manchester, England, that killed at least 22 people.

Most venues have strict rules about bags, backpacks and coolers. Some check items thoroughly before allowing them inside an arena and others do not permit them at all. Venues also employ security detail to check those attending events as well as plainclothes detail to monitor the crowd. In the Unites States, the Department of Homeland Security warned that the U.S. public may experience increased security at public events.

Hong Kong’s AsiaWorld Expo, where Ariana Grande is scheduled to hold a concert in September, said it plans to improve security at all concerts and events. Besides baggage inspection, there will also be metal detectors and search dogs, it said in a statement.

According to the South China Morning Post, the Hong Kong venue said it will begin using metal detectors to screen for potential threats, in addition to its usual backpack and baggage inspections. It also said it would consider using search dogs for any suspicious items or requiring visitors to wear security straps to track them while in the venue.

One mega event, the annual Indianapolis 500 over Memorial Day weekend, took to heart the task of keeping attendees safe. Adding to security planning measures for more than 300,000 attendees was the safety of Vice President Mike Pence, who was expected to attend—and arrived on Sunday morning.

Indy 500 crowd, May 26, 2017. Photo by Dana Garrett

Reuters reported that the Indy 500 has a Homeland Security SEAR 2 (Special Event Assessment Rating) designation, which means federal assets can be brought in to enhance security efforts during the event.

The Indy 500 is regarded as the world’s largest single day sporting event. Only venues on par with the Super Bowl and the Democratic and Republican conventions are given higher security ratings. Local, state and federal agencies contributed to security efforts at the Indy 500, including sniffer dogs, license plate recognition equipment and multiple security checkpoints to enforce restrictions.

There are those who believe, however, that even with enhanced measures, terrorist acts cannot be completely anticipated or stopped.

“Whatever is done—and in this case it’s British intelligence which is considered among the best in the world—it won’t prevent such incidents happening,” Jean-Charles Brisard, president of the Centre for the Analysis of Terrorism told Reuters. “You can bring back the perimeter, add security gates and as many controls as you want, but that will not change the fact that a determined individual will carry out his act if he is not caught before.”

Fewer Sleepless Nights for Compliance Executives

Improved compliance programs, sufficient resources and board access have meant fewer concerns about personal liability for compliance executives, according to a study by DLA Piper.

In its 2017 Global Compliance & Risk Report, DLA Piper found that 67% of chief compliance officers surveyed said they were at least somewhat concerned about their personal liability and that of their CEOs, which was down from 81% in 2016. And 71% said they made changes to their compliance programs based on recent regulatory events, up from just 21% a year earlier. The study found that globally the compliance function is becoming more independent and prominent in large organizations.

There still remains room for improvement, however, most notably in compliance’s relationship with boards of directors. Directors, surveyed for the first time, were more uneasy, with 82% expressing at least some concern about personal liability. “This is likely related to other findings that show lingering kinks in communications channels and a persistent lack of training for directors. Together, these findings indicate that the relationship between the compliance function and boards needs work—despite efforts taken by organizations to upgrade their compliance program,” DLA Piper said.

In 2016, 77% of compliance executives said they had sufficient resources, clout and board access to support their ability to effectively perform their jobs. This year the number rose to 84% who said they felt that way. The improvement is possibly a reflection of the increased percentage of respondents who had the resources to make changes to their compliance program, compared to 2016, according to the survey.

While more respondents said they are increasingly able to affect change, obtain the resources they need and access senior leadership, however, a larger number said their budget was not high enough to accomplish their goals, from 28% in 2016 to 38%.

Boards had a different view, with 53% of directors agreeing strongly that their compliance group had sufficient resources, clout and board access. This was compared to just 29% of CCOs, which could indicate that CCOs are not effectively communicating their needs, the company said.

Of concern was that many directors appear to be receiving inadequate reporting and training on compliance matters. About a quarter of both CCOs and board members said the compliance function at their organization reports to the board less than once per quarter.

Of training, the report said that in light of a perceived heightened liability exposure for directors, it is puzzling that 44% of director respondents said they hadn’t received any training on compliance issues. Given evolving compliance standards and regulations—such as new Securities and Exchange Commission guidance on conflict minerals and updated DOJ guidance on corporate fraud—it’s arguable that training is more important than ever. Failure to engage in training could amount to a breach of fiduciary duty.

Almost half of respondents, 46%, identified monitoring as the weakest part of their compliance program. Monitoring, however, is particularly important in managing third-party risk, as regulators remain focused on violations related to third parties and as companies struggle to manage sprawling global organizations, DLA Piper said.

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