Brexit - Impact on the UK insurance industry

Holly Deakin contributed to the writing of this post

Brexit – do not panic, Brad Pitt and Angelina Jolie are not breaking up! Brexit is the term which denotes Britain exiting the EU. 

Victory for the Conservative Party at the UK General Election on 8 May 2015 brings the promise of a national referendum on whether the UK should remain a member of the European Union (EU). Prime Minister David Cameron has pledged to hold the referendum by 2017 to let the public voice the outcome of this intensifying debate that has been dominating news headlines.

Great Britain has been a member of the EU for 40 years. EU membership allows UK businesses the right to trade freely across the entire EU market. UK insurers can write business in EU member states without additional local capital requirements. Should Brexit occur, the EU Treaty would require the UK to negotiate a withdrawal agreement which could result in full denial of access to trade freely in the future.

Reasons to remain

Access to the world's largest single market

EU membership provides UK insurance companies direct access to a single insurance market in 28 countries, comprising of over 500 million people1. Policyholders enjoy a greater variety of choice in insurance products. Insurers can conduct cross-border business without requiring further authorisation or incurring additional local costs. Should the UK divorce itself from the EU, UK insurers may be required to establish EU-domiciled subsidiaries or branches in order to underwrite business in the respective territories. Significant cost and resource implications will result from this, as well as the increased likelihood of insurers relocating from the UK to EU member states. Deutsche Bank has already set up a working group to review whether to move parts of its British divisions to Germany if the UK leaves the EU. We could see UK based insurance companies following suit. 

"It may not be all doom and gloom as it can be an 'amicable divorce' "

Many large nations such as the United States and China, view the UK as a direct platform for trading in the EU market. This perspective could dramatically change if the UK revokes its EU membership. If access for UK insurers is reduced or denied, many business opportunities will tumble and investment in the UK insurance industry will subside.

Ability to influence EU regulation

The second major argument supporting the UK remaining in the EU from an insurance point of view is regarding regulation. The UK’s influence over EU insurance regulation would evaporate following a termination of EU membership. The UK would lose the ability to sway the EU’s plans regarding free-trade agreements such as the Transatlantic Trade and Investment Partnership with the US. A common misconception is that being outside the EU would liberate UK insurers from the stringent compliance of Solvency II. On the contrary, the Prudential Regulation Authority (PRA) has demonstrated a desire to go beyond the EU rules and the UK has traditionally been ahead of the game in terms of insurance regulation. Insurers will be Solvency II compliant by the time the referendum takes place, therefore it is difficult to imagine the PRA significantly deviating from Solvency II even if the UK does exit the EU.

"Great Britain has been a member of the EU for 40 years. EU membership allows UK businesses the right to trade freely across the entire EU market. "

Reasons to revoke

Imperfect single market

The EU is not a perfect market. The Eurozone crisis has highlighted the lack of dynamism that exists within the EU. David Cameron has stressed the need for the focus of the EU to shift towards supporting economic growth and ensuring that all EU based corporations have the best possible opportunity to compete in the global market. Some argue that the UK could be a more attractive territory to place business if it were independent of the volatility and crisis of the Eurozone market.

Switzerland and Norway are examples of thriving and financially strong nations who are not members of the EU. Both countries have access to the EU market but do not have to comply with all EU laws. Two of the largest and most successful insurance companies globally are based in Switzerland; Zurich Insurance Group and Swiss Re.

Regulatory burden

Many insurers think of Solvency II as using a sledgehammer to crack a nut. The estimated cost for the UK’s largest insurers to comply with Solvency II exceeds £200 million, with Lloyd’s of London already spending in excessive of £300 million2 in compliance. Prudential have hinted in the past that they would move headquarters from London to Hong Kong to escape the tough capital requirements for EU insurers. 

If the UK were to exit the EU, UK insurers would be free from the burden of Solvency II and could carry on operating in a regulatory environment that has successfully been operating for decades. This would not impact the credibility of the UK insurance industry because for years it has been ahead of the game, and without the colossal costs of Solvency II. Solvency II is not the only stringent regulation that UK insurers could be exempt from. The EU Gender Directive could be lifted from UK insurers, allowing them to factor gender into the pricing of insurance. 

What is the likely outcome of the referendum?

An event like this has been seen before in the UK, in 1975 regarding the membership of the European Economic Community (EEC). The result of the public vote back then was for continued membership. The same could happen again, but at the present it is unknown on how the outcome will swing. The results of a major Confederation of British Industry (CBI) in July 2013 concluded that 78%3 of UK based business were in favour of Britain remaining in the EU.

Key Takeaways

Whichever side your company supports, it will be a good idea to get involved and start lobbying your point of view.

The date of the referendum on the EU is currently undecided. Even if UK do exit EU, it may not be all doom and gloom as it can be an “amicable” divorce and the UK could still retain strong ties with EU nations if David Cameron can handle this carefully.  However, it would be wise to analyse how your company may be impacted under different scenarios and formulate options available that could minimise the potential impact much like what the Bank of England is planning to do (secretly).