Brexit and the UK insurance sector

The ultimate outcome of Brexit negotiations is hard to predict. It seems likely that reciprocal passporting rights in the EU single market, on which insurance groups' European business models depend, will be lost.

Insurers therefore, need to have new structures in place for whenever any transitional arrangement expires - or as soon as March 2019 in the event of "cliff edge" Brexit in which no transitional period is agreed. A number of UK-based re/insurers have already announced plans to set up subsidiaries in other EU27 countries, in order to maintain passporting rights with other parts of the bloc. The re-organisations that accompany the fallout from Brexit will likely add to insurers' costs, at least in the near term.1

Importantly, not all cross-border business need be hit by Brexit. London market insurers may still insure European risks where local law does not mandate need for a local licence (known as non-admitted business). The General Agreement on Trading Services, which is annexed to the World Trade Organization rules, covers marine, aviation and transport (MAT) insurance written in this fashion, while reinsurance may be written on a non-admitted basis under Solvency II rules, provided the UK attains regulatory equivalence. As a result, UK insurers may be able to continue to access risks freely across the EU for MAT insurance and reinsurance, even if passporting rights are lost.

Recent indications are, however, that some EU member states are looking to tighten regulation of non-admitted business. In July 2015, the EU Commission expressed the view that "a third-country insurance undertaking may only insure risks located in a Member State through a branch authorised by the competent supervisory authority of that Member State".2 If the Commission's view is widely adopted by EEA states, it will affect UK insurers' ability post-Brexit to write new business in EEA states on a non-admitted basis (ie, without establishing a branch). Moreover, to the extent that global reinsurers are not allowed to service and write new contracts in the UK under existing arrangements, this could lead to significant increased reinsurance costs for UK insurers.

Estimating the exact impact of Brexit on UK insurers is nigh impossible. However, rough estimates of the potential effects on the overall UK insurance market can be provided under two alternative scenarios:

  • Base case: Leaving the EU single market and customs union leads to a permanent reduction in UK national income which in turn reduces UK domestic insurance premiums by a little under 4% by 2023, according to Swiss Re Institute estimates. Additionally, the prospective loss of passporting rights means that some home-foreign business (ie, cross-border business where the underlying risk is located overseas) will no longer be written from the UK. This is estimated to amount to around a further 4% of premiums.
  • Downside scenario: In addition to the loss of passported business with other EU countries, should the UK not be granted regulatory equivalence, cross-border MAT and reinsurance premiums will also disappear. Such a cliff edge outcome would likely be part of a disorderly Brexit which would hit UK economic growth and reduce domestic premiums further. Combined domestic and home-foreign premiums could be reduced by close to 15% by 2023.

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1. Uncertainty about transitional arrangements means the timing for reorganisations will become increasingly tight as the March 2019 deadline approaches. Authorisation as an insurer in an EEA state, portfolio transfers, and other relevant processes (eg SE conversions and redomiciliations) typically take 12 months or longer.

2. This is the Commission's view of the effect of Article 162, Solvency II.