Following the Brexit result two years ago, questions remain over the impact it will have on the UK’s powerful insurance industry.
On 29th March 2019, the UK are forecast to the leave the European Union and there is still a high level of uncertainty within the insurance market as to what may be the consequences. With the UK insurance sector responsible for £1.8 trillion worth of inward investments what is undeniable, is that there is a lot at stake.
Financial services industries in the UK currently operate on a ‘passporting regime’, which is intrinsic to the single market of which the UK will no longer be a member. This will affect both the UK, and European insurance companies operating within the European Economic Area.
By leaving Europe, the biggest risk at stake is that the UK loses its ‘passporting’ rights to freely underwrite policies and insure risks across European borders. This will have profound effects on the UK including reduced access to insurance capacity, potential loss of EU employees, potential loss of the ability to deal with EU clients, and potential increased cost in doing business.
It is however, not just the passporting rights that will affect UK financial services companies. These entities will also be directly impacted by legal and regulatory changes, political ramifications, and subtle demographic shifts all directly or indirectly associated with Brexit.
What will the post-Brexit era look like for the insurance sector?
The current financial risk management framework for the EU is called Solvency II. This is a one size fits all policy for all EU companies who offer insurance products. Once the UK leaves the EU, they will no longer have to comply with the stringent regulations that Solvency II constitutes.
This will be advantageous to an extent, enabling the UK to create their own set of rules and regulations. However, it is likely that it will be a long and onerous process before these regulations are established. Additionally, firms are likely to incur large short-term costs to ensure that their policies, documents, literature and promotions are compliant with new UK legislation.
The extent to which the UK will be able to diverge from Solvency II and other EU regulation is largely dependent upon the final agreement between the UK and the EU. This is likely to fall somewhere on a scale that spans from a full ongoing adoption of Solvency II at one end, to the introduction of a new drastically different regime at the other.
It is likely that following the exit from the EU, Britain will follow similar restructuring to either Switzerland or Norway, both of whom operate independently of the EU.
- The Swiss model- this model is very similar to the Solvency II, however they have a level of flexibility
- The Norwegian Model- this model would allow the UK be part of the European Economic Area. Although not a member of the EU it would grant the UK the free movement of persons, goods, services and capital within the European Single Market.
While both of these provide viable solutions, the main issue is that the UK will now have no influence on the future of EU legislation. Considering the insurance sector’s dependency upon European business, the UK may inadvertently become more controlled by the EU than ever before.
Insurance and the single market
In a recent governmental white-paper on Brexit, Theresa May confirmed her plans to leave the single market; essentially reiterating that Financial companies will no longer be able to use their ‘passporting’ rights to sell to the UK without barriers.
What was not clarified however, is what this new set of rules will look like to ensure that UK insurance companies can continue to sell within the UK. The issue is further complicated as these passporting rights will not only affect UK insurers, but also insurers from other countries who have a base in the UK. It is expected that a number of these affected insurers will look to move to EU countries, so that they can continue to enjoy the right to trade across borders.
Huw Evans, Director General of the Association of British Insurers issued a statement saying: “Having to comply with financial regulations we have no say over would be the worst possible scenario for our world-leading insurance sector, so we will look to the government to negotiate a better outcome than this (Twitter, 2018).”
The financial sector is adamant that the government consider them as a means of priority and put in place a succinct plan in the event of a no deal.
Lloyd’s subsidiary in Brussels
As the possibility of the UK leaving the EU without a deal becomes increasingly likely, Lloyd’s is rapidly accelerating plans to transfer European contracts to a Brussels subsidiary. This is the Lloyd’s market preferred solution to protect their European client base, who make up 15% of their overall contracts (Lloyd’s, 2018). The new subsidiary will be set up as a new insurance company with 19 branches throughout Europe, including the UK.
Amongst the uncertainty of Brexit negotiations, Lloyd’s Brussels will ensure that partners in the EU27 can continue to benefit from Lloyd’s specialist expertise, innovative policies and financial security post-Brexit.
Although no one can be certain of any outcome at this stage of the negotiations, with the insurance sector’s solid foundations in the UK and the establishment of Lloyd’s Brussels, it is hopeful that any agreement reached will ensure minimal impact.
Alternate Swiss and Norwegian models demonstrate good examples of operating in Europe but out of the EU. With Solvency II as a guide therefore, and some room for flexibility in cross border traders, it is believed that the UK will be able to create a bespoke model.
There are certainly potential benefits that will arise out of the UK’s exit from the EU, but the Insurance sector must brace itself for years of negotiations and lobbying before these benefits are realised.