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Brexit: Origins and Impacts for the Risk and Insurance Industry

Political risks often fly under the radar for many firms, but surveys of risk managers both in mature and emerging markets increasingly show they are worried about them. In the United Kingdom, Brexit is exposing long standing economic and social frustrations and threatening to create significant disruption for organisations and businesses.   

Globalisation and the revolution in communications and knowledge driven technologies and economics since the 1980s have decimated Britain’s traditional industrial communities in the north, Northern Ireland and Wales. Simultaneously, EU immigration meant that by 2017 over 14% of the overall population was born, abroad creating increased competition for jobs. These pressures came to a head during the 2008-2009 recession, the subsequent austerity programme and the anaemic recovery. Anger against these forces is mapped out by the Brexit referendum results.

But this antipathy is not new, Britain has had a long and ambivalent relationship with Europe. Concerns over the role of the empire and the welfare state meant Britain did not seek to join the European Economic Community when founded in 1955 and even after it joined in 1973 concerns remained that it was either a neo-liberal free trade club, or a massive statist project threatening British sovereignty.

As such, the relationship between The EU and the UK has only ever been transactional rather than true a partnership. Brussels has been a convenient target for UK politicians over the years when difficult choices had to be made and disillusioned and economically suffering Britons began to conceive of it as a hyper-centralised and extravagant bureaucracy. In 2016 they were prepared to listen to voices attacking it as “an out of touch elite”.    

As a no-deal exit becomes more likely, there are few signs that UK politicians are aware of the significant barriers that will impair the delivery of services to EU based clients, preferring to focus on goods and manufacturing. Given the length of time it normally takes the EU to negotiate free trade agreements covering both goods and services with third parties, there is little prospect of a quick deal to reduce this risk.  

Some countries such as France and the Netherlands are preparing emergency decrees to allow UK services, particularly financial, to operate in their countries in the first days after Brexit. When these expire, however, loss of so-called “passporting”, whereby an insurer authorised in one EU country can operate across the bloc, raises serious questions about the ability of the London Market to service its European policy holders, who bring GBP 8bn in premium to this market every year. It also threatens to cut off UK based insurers from the over GBP 300bn of premium written in Europe every year. As a result, many UK based insurers as well as foreign insurers based in the UK for EU access, such as AIG, Chubb and even the Lloyd’s market, have begun to open subsidiary branches in the EU and move their policies across– a luxury smaller UK insurers do not have.   

On regulation the EU will surely not allow different financial regulatory regimes to exist outside their jurisdiction while doing business inside, which would be an intolerable threat to its national security. While the UK’s prudential regulatory regime is currently compatible with the EU, it is anticipated Britain will have to apply for third country Solvency II equivalency like Bermuda, Japan and Switzerland did – a process which took a minimum of five years in each case. There is little indication yet that the EU can or will speed up this process.

Long term considerations on trade barriers, regulation, divergent capital requirements, data sharing, industry skills and human capital, are largely being left to the future.