London will remain Europe’s financial capital despite Brexit

If Lloyd’s of London is serious about banning its brokers from enjoying a pint at lunchtime, which was last month’s edict from the top of the Richard Rogers building, Brussels is probably not the best place to open a new base. The beer is excellent.

Still, Lloyd’s Belgium-bound contingent will be few in number. The insurance market is moving “a few tens” of jobs from a London office that houses 700. Gags about Lloyd’s of Brussels don’t work, especially as the Belgian subsidiary, on day one, will employ fewer people than the Chinese one.

So should we stop worrying about a mass exodus of jobs from the City? No. Lloyd’s is a poor guide to the wider employment picture because its Brexit adjustment was relatively straightforward. To allow business to continue as normal, it just had to set up a separately capitalised subsidiary in the EU with its own management team. Note, too, that the non-UK EU is currently a small part of its business – about 11% of premiums.

For many big banks, the calculations on jobs could be very different. For them, the details of the trade agreement between the EU and the UK – assuming there is one – really matter. If vast chunks of EU-only financial activity have to be cleared within the EU, it is conceivable that sizeable trading teams could shift. Consider moves such as JP Morgan’s bid to buy an office in Dublin as sensible contingency planning: the bank won’t necessarily move hundreds of jobs, but it needs to be able to act quickly if necessary.

None of which alters the fact that London will remain Europe’s financial capital for the foreseeable future under almost all circumstances. Even if 1,000 HSBC jobs go to Paris, or wherever, London will remain streets ahead of its European competitors. Three decades of post-Big Bang concentration in the UK cannot be reversed overnight.

It’s on the global stage, however, that London could suffer more, at least until the new EU-UK financial arrangements are clear. Some of this financial activity can take place almost anywhere in the world. If you’re a US investment bank in New York, it’s currently an easy call to hire your globally-focused staff on the home front. In the banking jobs game, Wall Street looks the most obvious winner from Brexit.

The real concern for Lloyd’s

Lloyd’s financial figures for 2016 were the secondary story, but should not be ignored. Not for the first time, they told a tale of specialist insurance risk being seriously mis-priced in a world of low interest rates.

At a headline level, all looked calm: pre-tax profits were steady at £2.1bn and Lloyd’s return on capital slipped only modestly from 9.1% to 8.1%. Scratch the surface, however, and the picture is different. Higher investment returns, coupled with a handy boost from sterling’s fall, did all the hard work. Profits from underwriting, the day-to-day business, plunged. The combined ratio – how much premium income is paid out in claims and expenses – was 98%, not the comfortable 90% of a year ago.

If you’re in the insurance business, you can’t complain when risks materialise – in this case, hurricanes and wildfires. It was the first time since 2012 that claims have been above the long-term average. But you have to wonder what a truly horrendous year like 2011, which brought floods in Thailand and Australia, the New Zealand earthquake and the Japanese tsunami, would do.

Lloyd’s and its members could cope because the market remains well capitalised. But the impact would surely be far heftier than the £500m loss seen back then. They were gentler times – competition was less intense and premiums were higher. Note chief executive Inga Beale’s stark warning: “The current situation where (re)insurance demand continues to be dwarfed by overall capacity, and continues to fuel a highly competitive environment, is not sustainable.”

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