Brexit and the P&C insurance industry: What’s next?
Jun 24, 2016 | By Rosalie L. Donlon, PropertyCasualty360.com
Although the United Kingdom has voted to leave the European Union, it will take some time to understand the complete ramifications, especially for the property and casualty insurance industry. (Photo: iStock) Editor's note: Updated 4 p.m. ET
In a historic vote on June 24, the U.K. electorate voted to leave the European Union by a narrow margin: 51.9% to 48.1%. The immediate result is that Prime Minister David Cameron plans to resign, and financial markets around the world are jittery.
The longer-term effects of the vote are unknown at this point. It’s likely to take several years for the United Kingdom to repeal EU legislation and regulations, and there are several treaties to take into account as the process moves forward. It’s also not yet clear how the U.K.’s actions will affect its relations with such non-EU countries as Switzerland and Norway.
For insurance companies, the implications are similarly not yet clear. Lloyd’s of London Chairman John Nelson said in a statement, “I am confident that Lloyd’s will stay at the center of the global specialist insurance and reinsurance sector, and I look forward to continuing our valuable relationship with our European partners.
Underwriters have been making contingency plans to relocate, while international capital is expected to leave for more trade-friendly jurisdictions.
“For the next two years, our business is unchanged,” he added. “Lloyd’s has a well-prepared contingency plan in place and Lloyd’s will be fully equipped to operate in the new environment.”
Insurers face Solvency II concerns
Daniel Bruce, director at Crowe Horwath LLP and co-founder of London-based insurance industry risk consulting firm BaxterBruce, addressed the possible implications with the EU’s Solvency II directive, which introduced a new, harmonized EU-wide insurance regulatory regime.
“We expect the Solvency II requirements to remain, both in the short term during the two-year negotiating period and in the long term, through the granting of formal equivalence status. The U.K. has been a key player in formulating the Solvency II requirements, and we expect that the Prudential Regulatory Authority will be keen to proceed on a similar path.”
In this current period of excess volatility, Bruce expects there to be increased oversight of companies from the U.K.'s Prudential Regulatory Authority and the U.K.'s Financial Conduct Authority. “In particular, the PRA will be keen on insurance companies ensuring that their stress and scenario testing is up to date and reflective of the current economic and political environment. They will expect remedial management actions to be taken, as and where necessary, to maintain ongoing solvency.”
Insurers operating in more than one market will need to reassess their underlying market risk exposures, as well as any potential changes to the correlations across risk exposures, Bruce says. For example, U.K.-based companies with EU-based subsidiaries may become exposed to significantly more currency risk because of the volatility of the exchange rate. Assumed diversification benefits across international insurance entities at a group level may need to be revisited in light of the referendum outcome.
Comments from insurance industry
A round-up of comments from others in the insurance industry (thus far) follows:
XL Group plc: “This is an outcome that we have been preparing for, and over recent months we have worked across the business to understand how a vote to leave the EU may impact XL Catlin, and in particular our UK and European operations,” CEO Mike McGavick said in a statement. “Now that this historic vote has taken place, we will be working on the various operational and administrative aspects relating to the U.K.’s withdrawal from the EU. Fundamentally, we believe our strong global network and footprint keeps us well-positioned to continue delivering for our clients.”
International Underwriting Association of London: “The London insurance market is resilient and well-positioned to respond to the result of the referendum on the U.K.’s membership of the EU,” The International Underwriting Association of London stated. The association's statement noted that the insurance industry has been preparing for the possibility that the vote to leave would succeed and considering how to adapt their business plans. The statement also urged that the financial services industry — including insurance — must form a key part of any discussions about a new trading relationship between the U.K. and the remaining EU member states.
In a formal statement, Dave Matcham, chief executive of the association, added: “Clearly, the U.K.’s decision to exit the EU presents challenges for London Market companies and uncertainty surrounding the potentially prolonged nature of this process will be problematic for future planning. Our industry is, however, experienced in responding to change.
“The free trade benefits of EU membership have been vital in maintaining London’s position as a global insurance hub and are highly valued by IUA members,” he continued. “This is true both for insurers headquartered in the U.K. and those international firms that use London as their centre for European business.
“We know that many companies will now be considering their own individual responses. Continued access to European markets is essential and will, I expect, be at the forefront of the process to respond to the referendum decision. The IUA will be working with the London Market Group to ensure our industry’s views are fully represented as developments continue.”
Reinsurance Association of America: According to a statement from the Reinsurance Association of America, the stabilizing benefits that global reinsurance markets bring to communities are more important than ever, and the United States and EU should remain focused on reducing impediments to the free flow of capital and risk transfer, particularly related to conducting cross-border business.
Frank Nutter, president of the RAA, commented, “The impact of Solvency II, and now Brexit, has fostered some uncertainty for U.S.-based companies doing business in EU countries. In light of the Brexit vote, it is important for the covered agreement negotiations between the U.S. and EU to remain a top and immediate priority among all concerned parties. Such an agreement can resolve uncertainty and set a precedent for future regulatory agreements.”
Bermuda Business Development Agency: The CEO of the Bermuda Business Development Agency, Ross Webber, today made the following statement on the United Kingdom’s vote to withdraw from the European Union: “The United Kingdom has voted to leave the European Union, and the question now becomes how the actual process of that exit will be carried out. There is naturally much speculation and uncertainty over the vote’s political implications, as well as its socio-economic impact, and industry around the world will be closely monitoring how this affects the markets and business landscapes of the EU, Britain and their respective trade partners.
“In a global economy, Bermuda is affected, like other nations, by such major events,” Webber added. “We stand ready to deal with myriad eventualities. No matter how the exit unfolds, we remind our business partners in the U.K. that Bermuda continues to offer the same stable, attractive, effective and proven blue-chip international business domicile as it has for the past 70-plus years.”
“Today, in fact, Bermuda is better placed than ever to cater to the contemporary needs of international business. Attributes such as our stand-alone Solvency II equivalence with the EU and our progressive path towards Alternative Investment Fund Managers Directive passport rights in Europe may now appear even more attractive than they were a day ago. These are examples of regulatory votes of confidence given to Bermuda as a robust jurisdiction in its own right, and not contingent on our relationship with Britain.
Bermuda Insurance Management Association: “As an economic bloc, the European Union is stronger with the United Kingdom in it, yet respect has to be given to the decision of the British people in yesterday’s referendum. It likely will take years for a full departure of Britain from the EU, therefore it remains premature to comment on any effects the vote will have on the captive insurance market,” said Grainne Richmond, president of the Bermuda Insurance Management Association.” BIMA and our members will be monitoring the process closely in the U.K.”
Association of Bermuda Insurers & Reinsurers: According to Bradley Kading, president and executive director of the Association of Bermuda Insurers & Reinsurers, Bermuda’s Solvency II equivalence finding by the European Union will serve it well as the U.K. negotiates its multiyear transition out of the EU.
“The Bermuda equivalency is unaffected by the U.K. vote,” Kading adds. “ABIR has excellent relationships with both U.K. and EU policymakers and regulators. ABIR members provide vital insurance capacity that makes U.K. and EU insurance markets more competitive. ABIR members will be reviewing corporate structures to determine what changes in their regulatory footprints may be necessary in order to conform with expected changes in European regulatory governance.”
Lockton Cos.: In posting on its website, Lockton said that it believes the change — as regrettable as it is — will create opportunities for its clients, its insurer partners and its business. The change will likely create new products, new corporate structures and new businesses.
Lockton said it also believes that the London market and Lloyd's will remain crucial hubs in the insurance world. The rich depth of resources, expertise, and insurance capital have served clients well for centuries and will continue to do so.
Law firms weigh in
CMS: “Seismic, just seismic for the global insurance market based here,” says Stephen Netherway, an insurance partner with London-based commercial corporate law firm CMS, which counts insurers among its clients. “The playbook for distribution and route to European market has just been ripped up, and we enter the world of [former U.S. Defense Secretary Donald] Rumsfeld’s 'unknown unknowns.'
“For non-EU domiciled insurers and brokers based here, first up for review must be redomiciliation to preserve the certainty of single-market access. For others, can London remain a fulcrum for HQ operations, and if not there will be shrinkage? And spare a thought for those insurers domiciled in Gibraltar, many with strong U.K. links and workers. This is their Brexit, too, and they face the spectre of the flight of their passporting rights.”
Kaufman Dolowich & Voluck: Kevin Mattessich, managing partner of Kaufman Dolowich & Voluck’s New York City office and who concentrates his practice on U.S. and London Market insurers, notes that it may be years before we see whether Brexit has a sustained effect on the London insurance market. In the short run, he explains, dramatic change always roils financial markets, so of course financial institution and insurance stocks may suffer with the rest of the stock market.
The medium term may require some reshuffling of insurers’ three- to five-year plans, Mattessich says. “London’s involvement in at least some quarters of the U.S. insurance market has not been as great in the past decade as it once was, in part because of opportunities for London in the European market.” Now, London insurers doing business in the EU may have to step back and readjust plans if trade barriers or other costs of doing business go up. Increased costs of doing business on the continent may lead those insurers back to doing more business in North and South America or in the Far East, markets where London has a long-established presence that it can easily increase.
Mattessich adds, “This leads one to wonder whether an anticipated absence of London in the EU might harden the insurance market there, and whether greater involvement elsewhere could have the effect of further softening those markets. That again remains to be seen, but in the long run, Brexit is just like any market change — the prospect of immediate turmoil will be followed by the opportunity to make money for those who think it all through.”
Venable: Ashley Craig and Lindsay Meyer, partners in Venable’s Washington, D.C., office who counsel both U.S. and foreign interests on transactional matters and cross-border regulatory and policy concerns, noted that many U.S. financial institutions and insurance companies currently operate from the United Kingdom solely because they are able to provide services across the EU from their base in the United Kingdom (called “passporting”). “Unless otherwise agreed between the EU and the U.K., this will no longer be an option after a U.K. exit,” the partners said.
As a result, non-EU financial institutions and insurance companies might consider leaving the U.K. as a whole and establishing themselves in other EU countries (for example, France, Germany, Ireland or the Netherlands). “This will likely result in a spill-over effect on the business of other U.K.-based service providers, including law firms,” they added.
How the British voted
The vote on whether to leave the EU reflected internal regional differences. For example, in Scotland 62% of voters said the United Kingdom should remain, while only one small section of England voted to stay. Here is a look at the way the vote broke down:
(Source: Statista.)