Post-Brexit Game Plan

As Britain’s separation from the EU looms closer, businesses and their brokers strategize.
By: | April 7, 2017 • 6 min read

Now that the official wheels are in motion for the United Kingdom to leave the European Union by 2019, companies that have operations in the UK or conduct significant business there need to develop contingency plans for however the Brexit negotiations proceed.

The UK government’s plan is for a so-called “hard” Brexit, meaning that it plans to leave the EU single market and introduce some immigration controls over people coming from the EU into the UK, said David Gent, legal director at Bird & Bird in London. The UK would also no longer be a member of the EU Customs Union, which could mean some trade tariffs between the UK and EU.


“The precise terms of trade between the UK and the EU will be uncertain until a new free trade agreement between the two is negotiated,” Gent said. “There’s also a possibility that the UK and EU will not be able to reach an agreement.”

There’s also uncertainty over what the terms of a potential trade deal may be between the UK and the U.S., and how that might impact U.S. companies doing business in the UK, he said.

“The UK is commonly used by U.S. companies as a gateway country to trading with the EU, but after Brexit companies may want to rethink this, or if entering the EU market for the first time, look at another country instead,” Gent said.

Industry Impact

The financial services sector is expected to be particularly impacted, and many firms may move jobs to mainland Europe, he said.

Many U.S. life sciences companies have also established their European headquarters in the UK, and there’s been uncertainty about the future of the regulatory environment, including the conduct of clinical trials and approval procedures for medications and medical devices, said Sally Shorthose, a Bird & Bird partner. Currently the UK regime is “intricately incorporated” in the EU system, and the UK government has announced it would continue close relationships with EU regulators.

“… The changing strategic profile also changes the strategic risk profile. As a result, we just want to make sure the company’s insurance and risk management programs are performing at an optimal level.” — David Molony, risk finance consultant.

“My discussions with pharmaceutical companies indicate that if the UK is not part of the same regulatory environment, it would then become part of a third or fourth wave jurisdiction to get approval for new medicines,” Shorthose said. “If they have to pay once for EU approvals, they might not pay again for UK approvals in a hurry.”

The demand for goods and services from all types of U.S. businesses might be impacted by a downturn in the UK economy due to Brexit, as well as changes in UK regulations, said Eric Siegel, a partner at Dechert LLP in Philadelphia.

U.S. exporters should consider currency hedges if the UK pound falls further relative to the dollar, Siegel said. For example, a hedge that allows a U.S. business to convert pound-denominated sales into a stable dollar amount, or a hedge that pays off when the pound falls, could allow a U.S. business to keep its prices from going up for UK customers.

Building a Plan

Aon Risk Solutions is now offering clients a three-step Brexit Navigator tool to determine what could happen to their risk management, insurance and business continuity management programs after Brexit, said David Molony, a risk finance consultant for the firm in London. Initial risk assessments are based on how clients are currently using the “four freedoms of movement” that exist between the UK and EU — goods, services, capital and people — and how those freedoms could change after negotiations.

The next phase of Brexit Navigator involves the potential redesign of a client’s risk management and insurance programs if the client has to restructure its operations, he said.

David Molony, risk finance consultant

“Say a German company is selling goods in the UK, but if a there’s a potential tariff that reduces its profit margin, the company could then decide to concentrate business elsewhere,” Molony said. “That means the changing strategic profile also changes the strategic risk profile. As a result, during this phase we just want to make sure the company’s insurance and risk management programs are performing at an optimal level.”

During the tool’s execution and resilience testing phase, Aon will help clients determine whether their business continuity management strategies are still appropriate, depending on the changing business environment, whether or not they have the same number of employees in every location, and whether they’re still operating in those locations or in new locations.

Revisiting Legal Structures

Brexit could significantly impact the business operating models of insurance companies based in the UK and those who transact global business through a UK entity, said Greg Galeaz, U.S. insurance industry leader at PwC in Boston.

“If they continue to operate in the UK and then set up another operation, that could create some level of inefficiency and require additional capital,” Galeaz said.

Companies will also need to review their legal entity structures to determine both their capital and tax effectiveness post-Brexit.

Mark Weil, chief executive of Marsh UK and Ireland, said that the brokerage firm is concerned about the possible loss of passporting and the ability it affords clients to access insurers across the EU from a single country license. Insurers are acting to establish local licenses inside the remaining EU, so that they can passport from there.

“That’s Plan A,” Weil said. “It does, though, have some risk — the most obvious one is being timed out by the process. So we think clients and insurers need a Plan B that doesn’t depend on governments and regulators and which puts them back in control, keeping firms’ access to the broadest set of choices.”

Marsh has offices and licenses in all EU countries, giving it the ability to wholesale from its EU office network into the UK and vice versa, he said. The firm has shaped a “bridge” structure based on fronting that it uses in other regions such as Latin America, a structure that European insurers used before the single EU market and passporting existed.


Brexit could also increase the tax burden for multinationals, said David Jaffe, principal of Jaffe Counsel plc. Multinationals currently can move dividends up and down the corporate chain throughout the EU without tax consequences, but after Brexit, there may be tax costs for companies paying dividends to their UK units.

“The thing to remember is that this is going to be a roller coaster for a couple of years, a great period of uncertainty regarding the UK’s negotiations with the EU, likely with a lot of gamesmanship and drama,” he said. “The key for companies is to keep flexibility in their contingency plans.”

Brian Jacobsen, chief portfolio strategist at Wells Fargo Funds, said that the UK-EU relationship will likely stay fairly intact.

There may be some negotiations around the UK’s contribution to the EU’s budget, but for the most part, he anticipates free movement of goods, services and financial capital. &

Katie Kuehner-Hebert is a freelance writer based in California. She has more than two decades of journalism experience and expertise in financial writing. She can be reached at [email protected]

More from Risk & Insurance

More from Risk & Insurance

Risk Report: Marine

Crewless Ships Raise Questions

Is a remote operator legally a master? New technology confounds old terms.
By: | March 5, 2018 • 6 min read

For many developers, the accelerating development of remote-controlled and autonomous ships represents what could be the dawn of a new era. For underwriters and brokers, however, such vessels could represent the end of thousands of years of maritime law and risk management.

Rod Johnson, director of marine risk management, RSA Global Risk

While crewless vessels have yet to breach commercial service, there are active testing programs. Most brokers and underwriters expect small-scale commercial operations to be feasible in a few years, but that outlook only considers technical feasibility. How such operations will be insured remains unclear.

“I have been giving this a great deal of thought, this sits on my desk every day,” said Rod Johnson, director of marine risk management, RSA Global Risk, a major UK underwriter. Johnson sits on the loss-prevention committee of the International Union of Maritime Insurers.

“The agreed uncertainty that underpins marine insurance is falling away, but we are pretending that it isn’t. The contractual framework is being made less relevant all the time.”

Defining Autonomous Vessels

Two types of crewless vessels are being contemplated. First up is a drone with no one on board but actively controlled by a human at a remote command post on land or even on another vessel.

While some debate whether the controllers of drone aircrafts are pilots or operators, the very real question yet to be addressed is if a vessel controller is legally a “master” under maritime law.


The other type of crewless vessel would be completely autonomous, with the onboard systems making decisions about navigation, weather and operations.

Advocates tout the benefits of larger cargo capacity without crew spaces, including radically different hull designs without decks people can walk on. Doubters note a crew can fix things at sea while a ship cannot.

Rolls-Royce is one of the major proponents and designers. The company tested a remote-controlled tug in Copenhagen in June 2017.

“We think the initial early adopters will be vessels operating on fixed routes within coastal waters under the jurisdiction of flag states,” the company said.

“We expect to see the first autonomous vessel in commercial operation by the end of the decade. Further out, around 2025, we expect autonomous vessels to operate further from shore — perhaps coastal cargo ships. For ocean-going vessels to be autonomous, it will require a change in international regulations, so this will take longer.”

Once autonomous ships are a reality, “the entire current legal framework for maritime law and insurance is done,” said Johnson. “The master has not been replaced; he is just gone. Commodity ships (bulk carriers) would be most amenable to that technology. I’m not overly bothered by fully automated ships, but I am extremely bothered by heavily automated ones.”

He cited two risks specifically: hacking and fire.

“We expect to see the first autonomous vessel in commercial operation by the end of the decade. Further out, around 2025, we expect autonomous vessels to operate further from shore — perhaps coastal cargo ships. For ocean-going vessels to be autonomous, it will require a change in international regulations, so this will take longer.” — Rolls-Royce Holdings study

Andrew Kinsey, senior marine risk consultant, Allianz Global Corporate & Specialty, asked an even more existential question: “From an insurance standpoint, are we even still talking about a vessel as it is under law? Starting with the legal framework, the duty of a flag state is ‘manning of ships.’ What about the duty to render assistance? There cannot be insurance coverage of an illegal contract.”

Several sources noted that the technological development of crewless ships, while impressive, seems to be a solution in search of a problem. There is no known need in the market; no shippers, operators, owners or mariners advocate that crewless ships will solve their problems.

Kinsey takes umbrage at the suggestion that promotional material on crewless vessels cherry picks his company’s data, which found 75 percent to 90 percent of marine losses are caused by human error.


“Removing the humans from the vessels does not eliminate the human error. It just moves the human error from the helm to the coder. The reports on development by the companies with a vested interest [in crewless vessels] tend to read a lot like advertisements. The pressure for this is not coming from the end users.”

To be sure, Kinsey is a proponent of automation and technology when applied prudently, believing automation can make strides in areas of the supply chains. Much of the talk about automation is trying to bury the serious shortage of qualified crews. It also overshadows the very real potential for blockchain technology to overhaul the backend of marine insurance.

As a marine surveyor, Kinsey said he can go down to the wharf, inspect cranes, vessels and securements, and supervise loading and unloading — but he can’t inspect computer code or cyber security.

New Times, New Risks

In all fairness, insurance language has changed since the 17th century, especially as technology races ahead in the 21st.

“If you read any hull form, it’s practically Shakespearean,” said Stephen J. Harris, senior vice president of marine protection UK, Marsh. “The language is no longer fit for purpose. Our concern specifically to this topic is that the antiquated language talks about crew being on board. If they are not on board, do they still legally count as crew?”

Harris further questioned, “Under hull insurance, and provided that the ship owner has acted diligently, cover is extended to negligence of the master or crew. Does that still apply if the captain is not on board but sitting at a desk in an office?”

Andrew Kinsey, senior marine risk consultant, Allianz Global Corporate & Specialty

Several sources noted that a few international organizations, notably the Comite Maritime International and the International Maritime Organization, “have been very active in asking the legal profession around the world about their thoughts. The interpretations vary greatly. The legal complications of crewless vessels are actually more complicated than the technology.”

For example, if the operational, insurance and regulatory entities in two countries agree on the voyage of a crewless vessel across the ocean, a mishap or storm could drive the vessel into port or on shore of a third country that does not recognize those agreements.

“What worries insurers is legal uncertainty,” said Harris.

“If an operator did everything fine but a system went down, then most likely the designer would be responsible. But even if a designer explicitly accepted responsibility, what matters would be the flag state’s law in international waters and the local state’s law in territorial waters.


“We see the way ahead for this technology as local and short-sea operations. The law has to catch up with the technology, and it is showing no signs of doing so.”

Thomas M. Boudreau, head of specialty insurance, The Hartford, suggested that remote ferry operations could be the most appropriate use: “They travel fixed routes, all within one country’s waters.”

There could also be environmental and operational benefits from using battery power rather than conventional fuels.

“In terms of underwriting, the burden would shift to the manufacturer and designer of the operating systems,” Boudreau added.

It may just be, he suggested, that crewless ships are merely replacing old risks with new ones. Crews can deal with small repairs, fires or leaks at sea, but small conditions such as those can go unchecked and endanger the whole ship and cargo.

“The cyber risk is also concerning. The vessel may be safe from physical piracy, but what about hacking?” &

Gregory DL Morris is an independent business journalist based in New York with 25 years’ experience in industry, energy, finance and transportation. He can be reached at [email protected]