Brexit has happened – or, at least, Brexit Day has taken place. The UK is officially out of the EU but, as yet, there is still very little indication as to what this actually means. We are being phased out of the Single Market and the EU Customs Union and this could have a number of consequences for the financial services sector. In particular, there may be an impact on insurance premiums that could hit the industry and consumers alike.
What benefits did the free market offer?
As part of the Single Market, UK businesses had a fairly frictionless route for trade anywhere within the European Economic Area (EEA). Passporting rights are the element of the free market particularly pertinent for insurers. This was the right to operate in any EU member state no matter what the country of domicile. Passporting rights enabled insurers to have access to any other country within the EEA area without needing to be separately authorised in it.
What happens to passporting rights now?
This topic was raised frequently prior to the UK’s departure from the EU and the conclusion that many in the insurance sector came to was that it’s fairly certain passporting rights will now be lost. This will make it difficult for insurers to service cross border business now that the UK is out of the EU and may limit business reach. Unfortunately, no alternative has been suggested to passporting rights that would allow insurers to continue in the same way as before.
However, a couple of different regimes have been suggested as an alternative including ‘Solvency II equivalence’ - this would require the rules and regulations of the UK to be recognised by the EU as equivalent, or sufficiently similar, to those contained in Solvency II to facilitate aspects of EEA-UK trading. However, this isn’t an ideal solution and problems exist, including the option to revoke equivalence with just 30 days notice.
What are the key issues for insurers as a result of Brexit?
- A reduction in the size and choice of any future market
- Problems with regulation as a result of the fact that existing and previous policies cover cross-border EEA risks
- Insurers being blocked from writing new cross border policies
- Penalties and censure for insurers who go ahead and try to fulfil obligations under existing cross border insurances
All is not lost
This is an issue that the insurance industry has been aware of for some time. Some insurers have already got authorisation to continue as they were now that Brexit has happened. Others should still be able to write specific cross-border UK-EEA risks (e.g. marine, aviation and transit policies) under the World Trade Organisation’s General Agreement on Trade in Services (GATS) as long as certain requirements are fulfilled. But there are a lot of unpredictable elements involved in these and the other solutions on the table.
Brexit is likely to affect many in the insurance industry – from the work involved in restructuring a business to make it fit within the new circumstances, to the time necessary to understand the impact of any new regulations, it’s likely that insurers will pass at least a proportion of this cost on via a premium increase. This could be the biggest impact that Brexit makes where the insurance sector is concerned.