The UK has voted to leave the EU. What will this mean for the insurance industry?
While the specific consequences are not yet known, the impact of the Brexit vote on the insurance industry is likely to be far reaching in terms of operational structure, revenue generation, and the types of products insurers bring to market. Insurers will already be looking at their business strategies to mitigate the impact that the Brexit decision will have on their businesses. However, what is unclear is how much time insurers, as others in the UK, will have to plan their next steps.
There have been a number of conflicting articles in the press about the mechanism for the UK to withdraw from the EU and how to trigger Article 50 of the Lisbon Treaty, the process that is followed and who has the power to "press the button".
Article 50 is invoked when a member state notifies the European Council of their intention to leave the European Union. This notification is followed by negotiations between the member state leaving and the EU to explore an agreement on the terms of their exit. If after a period of two years, an agreement has not been reached, the EU can impose exit terms on the exiting member state. The two-year negotiation period can be extended, but only with the agreement of all the other member states.
The debate as to who has the power to trigger Article 50 is somewhat more contentious. There is some contrary academic and professional opinion as to whether a Prime Minister can utilise royal prerogative powers and unilaterally trigger Article 50, or whether Parliament has to be involved in the process. A UK law firm has already intimated a legal challenge in an attempt to block the use of any prerogative power in favour of an Act of Parliament. Any legal challenge to the withdrawal process or indeed the involvement of Parliament in that process could potentially elongate the UK's withdrawal, before the two year-negotiation period has even commenced.
On the one hand, such delays could benefit the insurance industry by increasing the time available for strategic planning. On the other hand, they could simply result in a greater period of uncertainty.
The terms of the UK's exit from the EU may have a significant impact on UK-domiciled insurers could well lose their current automatic access to the single market and consequently their ability to trade in the EU. Much will depend upon the precise nature of the ongoing relationship the UK negotiates with the EU and its other member states.
This does, however, create several practical issues for insurers, including operational employment issues. Insurers may give thought to moving their operational base to the EU or even merging with an insurance entity already domiciled within the EU; both would require a significant amount of planning and preparation.
Consideration must also be given to laws enacted by the EU which have effect in the UK. What is not clear is whether these laws will be repealed when the UK exits the EU. Regulations like the Solvency II Directive are significantly important to how insurers operate, impacting on minimum capital requirements and how they are regulated. While it is unknown whether there will be an appetite and resultant action to see Solvency II repealed, in the event that it is, those insurers looking to continue writing business within the EU post-exit will in any event need to adhere to the regulatory regimes of both the EU and the UK.
It is also important to remember when planning that the UK continues to be bound by any existing EU legislation, including any that is due to come into force prior to the UK's exit. This includes the EU General Data Protection Regulation, coming into force in 2018, which is likely to be before any exit. As it currently stands, insurers will still need to prepare their businesses for the incoming regulation, as well as for whatever comes afterwards.
As well as planning for impact mitigation, there may also be opportunities to grow certain classes of business. We anticipate that insurers may see an increase in demand for certain types of insurance product. Pre-Brexit, this may include 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 the EHIC & E111 could potentially cease to exist and this may result in an increase in the uptake of travel insurance policies.
There is significant change ahead for the market and it is difficult to anticipate the terms of the UK's exit from the EU. Until that becomes clearer, insurers will need to plan carefully for all possible scenarios to mitigate the impact of Brexit on their businesses while looking for new ways to generate revenue in an ever challenging market.
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