June 23rd saw the UK's exit from the European Union. It came as a shock to many, with the Remain Campaign odds on favourites to come through victorious.A month on, the UK population are still non the wiser as to what the future holds. All Brexit related movement is rather slow since David Cameron announced his departure from Downing Street. However, the speculators continue to voice their predictions and try to come up with the magic formula that will paint a picture; looking into the UK's future.
But how could it affect us working in the UK Insurance Industry? Nobody really knows. The best place to look is at the market's industry experts. These people are in possession of the facts, so you'd expect them to have a good understanding of the situation.
Continue reading to find out 4 potential ways the referendum result could affect the insurance industry...
1. Writing Business in the EU Market
One of the key arguments used as ammunition by the remain campaign was the UK losing the ability to trade freely within EU countries. It doesn't take a genius to figure out that implementation of restrictions on trading into 27 different countries could be detrimental to business.
Currently, certain authorised businesses are able to operate across the EU as long as they have a base in the UK. This is called 'passporting', and it enables UK (and American) insurance companies to operate in EU countries from a UK base. The Brexit result may prohibit the act of passporting unless a special arrangement can be negotiated in the withdrawal terms.
What could this mean for us as the policy holder? Well, money doesn't grow on trees and Insurers will have to make up these excessive costs up somewhere. And that could be in the form of higher premiums.
Oliver James Associates are a global recruitment partner for the Financial sector. They operate across key markets within Europe and therefore understand first-hand the issues being faced:
They make the point that Brexit could mean that Insurers have to set up branches local to EU countries in order to trade and write business there. To do this would take up vast amounts of time and resource, and in some cases would repel Insurers from wanting to keep operational branches in the UK.
In addition, the withdrawal of EU Insurers will reduce competition and prices are likely to go up.
2. EU Regulations
Though the Referendum result and subsequent media reaction was one of intense drama, Britain for now is still an EU country. Over the next few months, there will be a lot of head scratching going on behind the scenes. Although Article 50 states that we technically have 2 years in which we can negotiate our withdrawal terms, it's a common preference amongst MP's and the public that the dotted line should be signed sooner rather than later.
A huge argument for the leave campaigners was that we shouldn't have to comply with EU laws, or laws that aren't necessarily set by ourselves as a country. Insurance (and indeed the Financial sector as a whole), is a highly regulated industry. Many people believe that the change in regulations is where the biggest difference is going to be seen.
Paul Clarke, PwC's global insurance regulator commented:
“Potentially the biggest impact on the insurance industry will be on regulation. The EU drives the regulatory environment, Solvency II being a classic example. Not being part of the EU would hand more discretion to domestic authorities over rule design. From a practical point of view, it is likely the UK would choose to pursue a Solvency II equivalent approach. Ironically, the risk would be a UK outside of the EU, unable to influence from within, yet still compelled to follow EU regulation to remain competitive.”
There are two sides every coin however, and it's possible that no longer being regulated by Solvency II could be beneficial for the UK insurance market. It wouldn't necessarily damage our reputation and it would free up the excessive costs that many Insurers have seen since Solvency II came into place.
On the contrary, this could potentially mean less financial strain on the Insurers and hopefully the policy holders would benefit from that also. As organisations that procure insurance, our interests lie in our insurance companies coming through this relatively unscathed.
3. Access to the Single Market
No longer having access to the single market is potentially one of the biggest negative consequences Brexit could have on the UK industry. You can expect the negotiators to make every effort to ensure that access to the single market is agreed in the withdrawal terms.
The EU aren't going to make it easy for us though.
Terms that make leaving the EU appear straightforward to the other countries is the last thing they want. If the withdrawal terms were to include restrictions on trading into the single market, it creates several practical issues for UK based insurers; and indeed those with branches in the UK:
- Compliance to the single market
During this period of uncertainty, you can be sure that numerous Insurance companies are planning like they've never planned before. All of which could become very real should the withdrawal terms contain single market restrictions.
Insurers re-locating, not bringing in EU talent and complying with the single market means an all-round less competitive UK Insurance industry. Competition is what keeps us in a softer insurance market and ultimately keeps premiums down.
US Investment Bank JP Morgan stated prior to the referendum result that it may be forced to cut British jobs if we decided to leave the EU. LLoyd's of London Insurance Market also stated that leaving could put thousands of finance jobs at risk.
Along with Lloyd's, many other insurers pull talent from EU countries. This again is another reason why Insurer's may relocate and operate primarily elsewhere.
It seems that the biggest risk to us as policyholders is facing increased premiums due to costs on insurers and less competition.
Although there is no reason (in the meantime) for you to be worried about holding policies with UK Insurers, it may be a good time to investigate a self-insurance approach to cover some of your risk. Download our free eBook titled 'Self-Insurance: A Beginner's Guide':
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