Brokers

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.

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“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.

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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 Management

The Profession

Verizon’s risk manager David Cammarata loves when his team can make a real impact on the bottom line.
By: | May 2, 2017 • 4 min read

R&I: What was your first job?

I was a financial analyst with the N.J. Casino Control Commission.

R&I: How did you come to work in risk management?

I was told at a Christmas luncheon in 2003 that I was being promoted into a new job.

R&I: What is the risk management community doing right?

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I think the risk management community is getting a lot better at utilizing big data and analytics to manage risk. Significant improvements have been made, but there is still much more room for improvement.

R&I: What could the risk management community be doing a better job of?

I think that the insurance and brokerage communities need to really start thinking about what this industry is going to look like in 10 years. They need to start addressing how they are going to remain relevant. I think that major disruptions to existing business models will occur and that these disruptions combined with innovation and technological advances may catch many of today’s industry leaders by surprise.

David Cammarata, assistant treasurer, risk management and insurance, Verizon Communications Inc.

R&I: What was the best location and year for the RIMS conference and why?

San Diego, any year.

R&I: What’s been the biggest change in the risk management and insurance industry since you’ve been in it?

I think the advent of cyber risk and cyber insurance. For several years it has been, and it continues to be, the main topic of discussion at industry meetings.

R&I: What emerging commercial risk most concerns you?

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I think the most scary scenarios include a nuclear, biological, chemical or radiological event, a widespread global health epidemic and/or a widespread state sponsored cyber shutdown.

R&I: How much business do you do direct versus going through a broker?

We do almost all of our business through a broker.

R&I: Is the contingent commission controversy overblown?

No. It’s a conflict.

R&I: Are you optimistic about the U.S. economy or pessimistic and why?

Optimistic because hopefully President Trump’s policies (lower taxes and less regulation) will be pro-business and good for the economy.

R&I: Who is your mentor and why?

My dad, who passed away many years ago. He was very influential during the formative years of my career. He taught me how important integrity and reputation were to your brand and he had a very strong work ethic.

R&I: What have you accomplished that you are proudest of?

I would have to say raising two awesome kids. My daughter is graduating from James Madison University this year as co-valedictorian. My son is finishing his sophomore year at Rutgers and has near perfect grades. But more importantly, both of my kids have turned out to be really good people.

R&I: How many emails do you get in a day?

A lot.

“I love it when the risk management organization is able to contribute in a way that makes a real impact to the corporation’s overall objectives. On several occasions we have been able to make real contributions to the bottom line.”

R&I: What is your favorite book or movie?

“My Cousin Vinny.” That movie makes me laugh no matter how many times I watch it.

R&I: What’s the best restaurant you’ve ever eaten at?

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My dad used to take me to a place called Chick & Nello’s. It was an Italian place that did not have a menu. They came to your table and told you the two or three items they were making that day. The food was out of this world.

R&I: What is your favorite drink?

Iced tea. The non-alcoholic kind.

R&I: What is the most unusual/interesting place you have ever visited?

I can think of several places but for me it would be a tie between India and Italy. India just has such a different culture and way of life and Rome has breathtaking historical sites.

R&I: What is the riskiest activity you ever engaged in?

Well, one of the best thrill rides I’ve been on was Kingda Ka at Great Adventure. It feels risky but probably isn’t all that risky. I flew in a prop plane with my brother-in-law one time … that felt kind of risky. I have also parasailed, does that count? I think it definitely has to be driving on the N.J. Turnpike day in and day out.

R&I: If the world has a modern hero, who is it and why?

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What about the Fukushima 50? I don’t think I could have done what they did.

R&I: What about this work do you find the most fulfilling or rewarding?

I love it when the risk management organization is able to contribute in a way that makes a real impact to the corporation’s overall objectives. On several occasions we have been able to make real contributions to the bottom line.

R&I: What do your friends and family think you do?

I don’t think they really know. My children see me as dad; others just see me as an executive with Verizon.




Katie Siegel is a staff writer at Risk & Insurance®. She can be reached at [email protected]