Brexit and the great wall of Mexico

Don't misprice risk just because everyone else is doing it.

If ever we needed a reminder of how and why markets are not always rational, it came last Thursday, the day of the UK referendum on its membership of the European Union.

Before the result stock markets rallied hard, first on some favourable polling data and then on their own momentum.

Everybody figured the market collectively knew something - there wasn't going to be a shock exit result after all.

By the early evening, the betting odds on the UK staying in the EU were as short as 15-1 on and some bookies had stopped taking bets on "Remain" altogether. Yet all the polls were still calling the result at 50:50.

First rule of underwriting - don't write a 50 percent risk for a 6.66 percent rate-on-line.

The UK woke up to a new chaotic reality on Friday.

Here's what we know:

Barring the greatest U-turn in political history, in a couple of years' time the UK will lose its passporting rights for financial services into the European Union.

Passporting has nothing to do with equivalence - it is pure politics.

The only country not in the single market but with such rights is Switzerland. In return for this it has allowed the free movement of EU people across its borders.

In a 2014 referendum, its people voted to curb immigration and it is currently renegotiating this deal with the EU. Even though the Swiss have toned down their aims to incredibly modest local controls, the EU is still insisting on free movement and so there will be an impasse.

Because the referendum was so much about immigration, UK-EU passporting is therefore effectively dead.

Of course this doesn't matter for the London insurance market, as much as many assume.

For instance, Lloyd's hot ticket has not been its access to the EU, but rather its superb US and British Commonwealth brand and global licences, augmented by strategic positions in fast-growing emerging economies.

Just look at the spectacular growth of the Lloyd's platform in China in the last 12 months.

Only 14 percent of Lloyd's business comes from "other Europe" )which means Europe minus the UK).

Lloyd's might still go and renegotiate its EU licences state by state or, simpler still, it could incorporate a new platform in one of the 27 member states.

Problem solved.

Lloyd's of Paris does have a rather nice ring to it, although one suspects that a Lloyd's of Dublin, or indeed Lloyd's of (independent) Edinburgh, would be far easier to set up.

In contrast to passporting, equivalence is a far more technical affair.

There is no doubt that the UK will be deemed an equivalent regulator for the purposes of Solvency II. Indeed, the Prudential Regulatory Authority has probably approved more internal models than the rest of the EU put together.

So as others panic, we should not.

We mispriced risk on the downside last week and we should avoid mispricing it on the upside now.

After populism comes pragmatism.

The British people are already slightly shocked and remorseful at what they have done with their protest votes and are now ready to listen to reason over rhetoric.

But where it hasn't yet happened, the political elites will continue to be punished by the people.

So if you were in any doubt that a President Trump is possible this November you may want to start hedging now.

South Texan, New Mexican, Arizonan and Baja Californian construction firms might be a nice tuck-away - that Mexican wall won't build itself, you know.