Brexit Could Challenge Insurance Industry
As the United Kingdom moves closer to a vote on whether to leave the European Union, insurance industry experts are contemplating what an exit could mean.
While most experts believe the industry will continue to operate throughout Europe, the question is at what cost — and whether companies will need to open new branches and subsidiaries to underwrite polices in EU member states.
Many international insurance companies and brokers conduct business throughout the European Union from subsidiaries in London.
“No one wants extra bureaucracy, and nobody wants red tape but fundamentally it’s something as an industry we’re probably used to dealing with.” — Chris Johnson, executive vice president, FM Global
Chris Johnson, executive vice president at FM Global, said if UK voters approve the referendum to leave the EU on June 23, the potential for “red tape” could be “painful,” but the insurance industry will be able to work through it.
One challenge is that many insurance companies serve the EU through one or two offices, instead of now-closed branches in individual European countries. Brexit could essentially eliminate those efficiencies.
“No one wants extra bureaucracy, and nobody wants red tape but fundamentally it’s something as an industry we’re probably used to dealing with,” Johnson said.
In addition, he said, many insurers that don’t have a large footprint throughout Europe are currently domiciled in London and make use of the ability to trade across borders under the EU’s Freedom of Services Act (FSA).
This “passporting” allows insurers to access markets throughout the continent, reducing capital expenditures by serving multiple countries from their base in London.
“It’s so attractive because you have one set of regulators and one set of capital,” Johnson said. “Now, if you incorporate new insurance companies as a result of Brexit, this becomes [additional] capital and government requirements. You have to set up [new] companies to transact business.”
The cost and complexity of maintaining additional domiciled entities will add to costs and for companies lacking the resources, it may be a barrier to entry when providing coverages across multiple countries, he said
Moody’s Analytics reported it does not expect changes in insurance passporting rights to have profound implications for the industry overall as many of the largest groups conduct business through local subsidiaries rather than on a cross-border basis.
Helena Kingsley-Tomkins, Moody’s assistant vice president, said a bigger concern is that a vote to leave the EU could lead to volatility in the financial market, impacting the Solvency II capital ratios of insurers.
“Market volatility as a result of Brexit would impact all insurers to a certain extent, whether they are headquartered in the UK, EU or elsewhere,” said Kingsley-Tomkins.
She also said that economic uncertainty caused by Brexit could reduce the demand for some commercial insurance products.
“The single market is vital to London’s ability to service its global clients. It is therefore understandable that the British Insurance Brokers’ Association has put Brexit at the top of their agenda this year.” — Sean McGovern, chief risk officer, Lloyd’s of London
Sean McGovern, Lloyd’s chief risk officer, said at a speech to the Insurance Institute of London in February 2016, that exiting the EU will create a “level of uncertainty for the [insurance market] we have rarely experienced.”
The biggest risk, he said, would be the disruption of the European single market which constitutes the world’s largest insurance market with more than 500 million people, a global share of 33 percent and premiums of nearly 1.4 trillion Euros.
McGovern said Lloyd’s is working on contingency plans to deal with a range of possible scenarios to ensure it can continue to provide the market with access to the EU.
He said they are “confident” they will find a way through the uncertainty and continue to write business in local markets under the Lloyd’s structure.
“The single market is vital to London’s ability to service its global clients. It is therefore understandable that the British Insurance Brokers’ Association has put Brexit at the top of their agenda this year,” said McGovern.
Johnson said the impact of Brexit could ultimately come down to the size of the insurer, the products they sell, and the scope of their operations.
While larger companies and brokers would be “structurally less impacted,” they might find themselves dealing with a “different landscape” in how the insurance itself is transacted.
“Companies [selling] things like travel insurance, medical insurance [and other products] could find this could be very disruptive to some of their businesses in settling claims and moving money around,” he said. “For some markets it could be a mess.”