Some of the largest insurers in the UK (Aviva, Legal & General and Standard Life) saw an immediate fall in share price by 15 per cent and the question now begs how Brexit will impact the UK insurance industry.
The UK manages £1.8 trillion worth of investments, making it the third largest insurance industry in the world, according to the ABI. By leaving the UK, the biggest risk is that Britain could lose its passport rights to freely underwrite policies and insure across the European borders.
If the UK does not maintain a strong hold of its insurance sector, it may have profound effects on the UK economy, including the £18 billion worth of taxes that it contributes and employment of 300,000 people. We look at the next steps that UK insurance will be taking in the post-Brexit era.
The UK insurance market will no longer be bound by EU laws, meaning that it can create a whole new set of rules and regulations if it wants to. The EU framework currently known as Solvency II is the one size that fits all policy for all EU countries that offer insurance products for vehicles, homes, businesses and more.
UK insurance firms can now be relieved from the heavy compliance that is enforced by the EU and new opportunities will emerge. For instance, the EU Gender Directive means that UK firms cannot use gender when underwriting policies, despite evidence that females are safer drivers and could be entitled to lower premiums. This is something that the UK could now do away with. This type of directive and several others will be lobbied by industry bodies such as the ABI to form a new legal framework.
Despite this advantage, creating a new set of UK rules and regulations will come with its own compliance. Firms will need to make sure all their policies, documents, literature and promotions are compliant with the new UK rules and this will cause all insurers and brokers to incur huge costs in the short-term.
By leaving the EU, it does not mean that the days of the UK and the EU working together are over. The UK will still need to work with the EU and vice-versa. This will require a restructuring of the current system.
The two most commonly spoken about models are those from Switzerland and Norway which both have thriving insurance industries despite not being part of the EU.
The Swiss model contains a structure that is equivalent to Solvency II and they have ‘matching adjustment’ rules – so essentially similar to the EU’s regime with some of their own flexibility.
The Norwegian model refers to the UK being part of the European Economic Area (EEA), so not being part of the EU but using their position as a European country to remain within EU legislation and continue to operate freely across the borders.
Whilst these two options propose useful alternatives, the main issue is that the UK will have no or little influence on future EU legislation – so they may be more controlled by the EU regulations than ever before.
Further reading on Brexit
- Brexit business impact: Will Brexit trigger a drop in revenues in 2019?
- Brexit trade talks: Will Juncker and Trump’s talks freeze the UK out?
- How much of a threat does Brexit pose to UK entrepreneurs?
Insurance and the Single Market
The issue of market access is one that has particularly loomed for insurers, with questions around trading tariffs being raised. In the 2018 government whitepaper on Brexit, Theresa May confirmed plans to leave the Single Market, meaning financial services companies will no longer be able to use their ‘passporting’ rights to sell to the EU. These ‘passporting’ rights currently allow such companies to sell to EU countries without barriers.
‘The loss of these rights means a new set of regulatory rules for financial services would need to be made in order for insurance companies to continue to sell outside of the UK – and what this new regulation would look like is still largely unclear,’ says insurance firm iG04.
“The loss of passporting rights doesn’t only affect UK insurers, but also insurers from other countries who have a base in the UK”
‘This may result in some companies moving out of the UK and into other countries so they can continue to enjoy these ‘passporting rights’ – unless the UK government can negotiate a suitable alternative,’ says iG04.
This has unsurprisingly caused continued debate from insurance industry experts. Huw Evans, Director General of the Association of British Insurers, issued a statement shortly after the release of the whitepaper, 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.’
His statement mirrors the concern surrounding the impact of Brexit on the insurance industry, with many companies calling for the government to consider the needs of the financial services industry in its ongoing plans for leaving the European Union and for a plan to be put in place in the event of a ‘no deal’ following Brexit negotiations. While the next steps of the government remain to be seen, regulation following the UK leaving the EU continues to be a point of uncertain for the insurance industry.
Is Brexit a bad thing for the UK’s insurance industry?
In this period of uncertainty, it is hard to say whether Brexit will negatively impact the UK’s insurance sector. However, based on the feedback from some of the biggest insurers in the UK, the likes of Lloyd’s and Be Wiser state that they will be unaffected by the Brexit negotiations, largely due to having solid foundations in the UK.
Other insurance experts have highlighted the robustness of Britain’s insurance sector which is ‘pioneering’ and ‘years ahead’ of other European countries. The UK are not going into this blind as the Swiss and Norwegian models have demonstrated strong growth and constitute good examples of operating in Europe but out of the EU. Provided that the UK maintains an equivalent to Solvency II, the infrastructure is designed to withstand a financial shock that occurs once every 200 years.
With the robustness of Solvency II and some room for flexibility, the UK can create a bespoke model which will allow them to continue trading in the EU and also scale effectively into growing markets such as China and America, a proposition that has been made difficult as an EU member. Combined, there are several positive take homes for the future of the UK insurance industry but it will involve years of negotiations and lobbying before we see a noticeable difference.