updated on 28 March 2017
QuestionWhat are the implications of Brexit for the UK insurance and reinsurance markets in the short term and beyond?
The only certainty in the context of Brexit is that it will involve an extended period of great uncertainty. The United Kingdom must renegotiate its trading arrangements not only with the European Union, but also with the rest of the world. This won’t be a quick process and, while there are different models which may apply to the United Kingdom (eg, the Norwegian model or the Swiss model), it is difficult at this stage to predict with any degree of certainty the terms of the United Kingdom’s exit from the European Union, or the nature of the relationship the United Kingdom will have with the European Union afterwards. Consequently, for most insurers it will be a case of monitoring developments closely, as negotiations progress, and of careful contingency planning to mitigate the impact of Brexit on their businesses while looking for new opportunities presented.
In the short to medium term, the United Kingdom will almost certainly maintain its position as a centre of excellence for (and as a world-leading market in) insurance and reinsurance. However, the market is competitive and developing all the time; and other jurisdictions would like to take business from the United Kingdom and eventually overtake it. There is a risk that, over the medium to long term, Brexit may enable this to happen, at least to some degree. How political negotiations progress, and the legal arrangements the United Kingdom is able to put in place over the next few years, will likely prove pivotal in preserving the position of the UK insurance and reinsurance markets.
In the Brexit referendum held on 23 June 2016, the UK electorate narrowly voted to leave the European Union. Nothing has changed as a result of the referendum itself; the United Kingdom is not yet legally committed to any particular timetable, or even to leave the European Union at all. However, once the United Kingdom gives formal notice of its intention to leave the European Union by triggering Article 50 of the Treaty on European Union, which the prime minister’s spokesperson has confirmed will occur on Wednesday 29 March 2017, the two-year exit process will begin. This two-year negotiation period can be extended, but only with the agreement of all other member states.
Exactly what life for the United Kingdom will look like outside the European Union is currently unclear. The ‘Norwegian option’ (consisting of continued access to the European Union’s single market through membership of the European Economic Area) was generally rejected by the Leave campaign and would not achieve any greater control over immigration than exists currently. Alternative models, such as the Swiss model (which would mean being outside the European Economic Area, but becoming an equivalent jurisdiction for some regulatory purposes) would likely take significantly longer than two years to agree. The default position, in the absence of agreement, would be a framework of agreements operating largely under the auspices of the World Trade Organisation. Any exit agreement would be negotiated separately from any agreement about the United Kingdom’s future relationship with the European Union, and the negotiations over the nature of our future relationship with the European Union could therefore extend significantly beyond the two-year negotiation period for negotiating our withdrawal from the European Union.
A huge body of UK law derives from the European Union and it is clear that, following Brexit, dismantling and replacing this will prove to be a formidable task. With that said, a considerable amount of work has already been done to identify the United Kingdom’s Directive implementing laws and the EU regulations that have direct effect in the United Kingdom, and these laws could all be “switched off” at the moment of Brexit by simply repealing the European Communities Act 1972 (ECA). However, the difficulty is that the United Kingdom is likely to need a long time to determine which EU laws it wants to keep, vary or replace; and great care will need to be taken to avoid holes appearing in the United Kingdom’s laws on exit (whether because the status of our Directive-implementing laws has been undermined by repealing the ECA and/or because the European Union’s regulations no longer have direct effect).
The answer to this problem is the proposed Great Repeal Act, which would repeal the ECA, freeze all relevant EU law into UK law, and then give policymakers the time they need to consider which laws to keep, vary or replace, using the United Kingdom’s ordinary law making powers.
The United Kingdom has been an EU member for 43 years and this membership has allowed our businesses to trade openly across the entire EU market - UK insurers have direct access to a single insurance market spanning 28 countries and approximately half a billion people, and insurers can conduct cross-border business without requiring further authorisation.
While the specific consequences of Brexit on the UK insurance industry are as yet unknown, its impact is likely to be far reaching in terms of the types of products insurers bring to market and in relation to insurers’ operational structures. Insurers will be looking at their business strategies to mitigate Brexit’s likely impact on their businesses. Below are some of the main potential impacts of Brexit on the UK insurance industry.
Access to the European Insurance Market
Continued access to the European insurance market will be a key concern for many UK insurers and reinsurers ((re)insurers), starting with the right to “passport” into other countries in the European Economic Area. Passporting allows UK-authorised (re)insurers to trade across the European Union on a “cross-border services” basis, or via a network of local branch offices. The right to passport will be lost when we leave the European Union, unless the United Kingdom can negotiate exit and/or future relationship terms that will allow it continue regardless.
If the right to passport is lost, UK (re)insurers with European businesses will need to restructure their businesses in order to continue underwriting business across Europe. That might involve the establishment of a new authorised (re)insurer somewhere on the mainland, which will have the benefit of the passport and will be able to carry on business across the whole of the European Union from its (non-UK) base. Alternatively, a UK (re)insurer may want or need to obtain the permission in every EEA state in which it wants to operate on a branch or (perhaps) cross-border services basis.
The regulatory regime
Possibly the biggest impact on the insurance industry could be on regulation. Solvency II is a European Directive which has codified and harmonised EU insurance regulation. The danger is that if the United Kingdom chooses to retain a version of Solvency II (perhaps to secure equivalence), it may have to adapt its local version of Solvency II to keep it sufficiently well aligned with the European version of Solvency II to be able to retain its equivalent status, while having little or no ability to influence how the European version of Solvency II develops.
Types of business insured
As well as preparing their businesses for regulatory change, (re)insurers will need to consider how the types of business they (re)insure might change as well. For example, pre-Brexit, (re)insurers may see an increase in the uptake of redundancy cover as individuals seek to protect themselves against any volatility in the employment market. Post Brexit, the reciprocal healthcare arrangements under European Health Insurance Cards and E111 cards, for example, could cease to exist, which may result in the increased uptake of travel insurance policies.
European insurers operating in the United Kingdom
European (re)insurers wanting to underwrite business in the United Kingdom will likely face similar problems in terms of needing permission to conduct insurance business in the United Kingdom if the right to passport is withdrawn. Negotiations will need to be carefully managed and the relevant players engaged, in order to mitigate against potential adverse consequences to the UK insurance market.
Ross Keeble is a trainee solicitor at Cooley.