In Depth - Brexit: What would a Brexit mean for the insurance industry?

There has been a smattering of official public comment from senior insurance and broking executives on the thorny subject of the UK’s upcoming vote on its position in the European Union.

But in bars and late night parties at the British Insurance Brokers’ Association conference, Brexit was one of the most popular subjects of conversation.

“My company has taken a neutral line on Brexit and no one is allowed to say anything about it publicly,” said one underwriter.

“Personally I’m still undecided on whether or not it’s a good thing. My head is telling me one thing, and my heart is telling me something else.”

The issue remains highly divisive. At the Manchester event, many individuals simply declined to comment for a vox pop on the referendum.

Melanie Hampton, managing director for broker Alexander Miller, said larger international firms had effectively muzzled staff who were pro-Brexit.

“I don’t work for Marsh, I don’t work for Aon or Willis,” she said. “Because I’m independent I can say what I really think. I’m fed up with the little girl being told what to do by Brussels. It’s about freedom.”

Hampton was one of 100 City names who wrote a letter calling for Brexit to the Evening Standard. Others included Dominic Burke, group CEO of Jardine Lloyd Thompson.

However, Burke declined to comment when contacted by Post. A spokeswoman for JLT said: “The views Dominic expressed are his own personal views and do not represent those of JLT.”

Other top names in insurance backing Brexit include Robert Hiscox, former chairman of Hiscox and now board member for Business for Britain.

But for every declared yes, there is a declared no. In a letter to The Times in February, key names in insurance who called for a remain vote include Adrian Montague, chairman of Aviva; Paul Evans, group CEO of Axa UK and Ireland; Patrick O’Sullivan, chairman of ESML; John Nelson, chairman of Lloyd’s; and Stephen Hester, CEO of RSA Group.

According to a recent survey commissioned by PR firm Haggie Partners, 68.7% of market practitioners believe Brexit would “hurt” or “severely damage” Lloyd’s of London.

Slightly more than a quarter (25.1%) believe it will have no impact, while only 6.2% believe Brexit would benefit Lloyd’s.

A straw poll by Post on Twitter found that out of nearly 50 respondents, 74% were for ‘remain’, while only 26% were for Brexit.

However, Hampton claimed London could stand on its own two feet as a centre of excellence for insurance.

“We’ve got more to gain than we have to lose,” she said. “Business comes to London because we are extremely good at what we do. We have a very well developed market, we have capacity and we have the skills set, and depending on what the market is doing – we’ve got the right pricing for it.

“Please explain why that is all going to stop if we leave a failing organisation, which is the EU.”

She said most of the concerns were vague and unsubstantiated: “I was having a lively debate with someone who was the CEO of a big insurance company. He couldn’t tell me exactly how we’d lose from Brexit except that it wouldn’t be good for business. The City as a whole is a cautious creature.”

Passporting
One of the biggest concerns for insurance that comes up time and again when discussing Brexit is the issue of passporting – where a UK-based firm is able to write insurance for anyone within the European Economic Area, without having capital holdings in every country.

Biba polled its own members and came out in favour of a remain vote. Lord Hunt, its chairman, said the potential loss of passporting rights was one of the biggest issues for brokers.

“Brokers gain huge benefits on the single market,” he said. “Whatever the new arrangements that would follow an exit look like, it’s unlikely that the current EU-wide passporting regimes, which many insurers and brokers, rely on would remain unless the UK agreed to be bound by the same regulatory regime. Unless that was agreed, passporting would cease.”

Dave Matcham, CEO of the International Underwriting Association, said its members had also come out in favour of remain.

However, he added if the vote was to leave then the two year period following, where the terms of the UK’s relationship with the EU were being renegotiated, would be time many companies could look at their structure.

“Some companies will need to look at whether, in the period immediately after the referendum, they need to start relocating certain disciplines and structures from the UK,” he said.

“Especially if the UK doesn’t look like it’s likely to get a deal which allows it to continue writing business for Europe. It’s the uncertainty that will be the issue in the early days after the referendum.”

Business from the EU
Matcham said of the IUA’s UK members, around 15% of business came from the EU. However, he said it wasn’t clear that all of it would be lost if passporting rights were revoked.

“[Firms] may not lose that business, but they might have to write it in another country,” he said. “But then the question becomes if they move a big chunk of their underwriting to a different country, will other parts of the company that handle non-EU business go to that centre as well?”

He said of its members 50% of business came from the UK and because of that, it was unlikely there would be a mass exodus from the UK.

“It’s hard to imagine companies that have chosen the UK as their passporting centre not having an office here at all,” Matcham added. “But they may downgrade it or downscale it.”

Geoffrey Maddock, a partner with Herbert Smith Freehills, said the loss of passporting could affect investment in the UK from larger non-EU groups, like those from Japan: “Some investors might be less keen on buying an entity that doesn’t have the right to interact with the rest of the EEA.”If the UK voted leave, there is likely to be a two year process where the government would negotiate the new relationship with the EU. There are two viable potential results of that.

The first is referred to as the ‘Norwegian model’, where the UK could remain a member of the EEA, but not the EU proper.

That would mean the UK would still be bound by EU legislation for the purpose of trade, but wouldn’t be able to have any say over the content of regulation.

“If we ended up as an EEA state, then legislation would be directly applicable in the way it is currently, but we would have no right to take any part in its development,” said Maddock.

The second option is for the UK to become an ‘equivalent jurisdiction’ in terms of regulatory framework.

“That would give the opportunity to jettison those parts of legislation that we’ve only accepted through gritted teeth,” said Maddock.

Among those parts was regulation on bonuses, he said, which had proven unpopular in the City. In addition, the proposed Financial Transactions Tax which the UK has been strongly against, could be fully repealed.

However, pursuing a goal of ‘equivalency’ would at the least mean the loss of passporting, explained Gavin Williams, another partner at Herbert Smith Freehills.

“The idea that we will be able to maintain full market access without paying into the budget and not accepting the freedom of movement of workers seems to me to be unlikely,” he said.

There are two types of EU legislation. The first are directives, which need to be passed by UK parliament to pass into the statue books. The other type of EU law is directly effective legislation – which is automatically applied to all members.

No longer binding
If the UK leaves the EU, all of the latter types of laws – like Solvency II –
will no longer be binding. Maddock said in the short term there would almost certainly be a “wholesale” readoption of those laws, with potentially “a few tweaks”.

Post contacted both the Prudential Regulation Authority and the Financial Conduct Authority to ask what considerations it had given to regulatory regimes should the UK leave the EU. A response had not yet been received by the time of publication.

In February, papers reported that the PRA had yet to contact banks to ask them what contingency plans they had in place in case of a Brexit. However, Maddock said some of his banking clients had, in fact, had discussions with the regulator on those issues.

He said it was equally likely the regulator had been in touch with insurers to discuss how they would respond to market volatility.

“It would be amazing if they didn’t have the same concerns and weren’t making the same demands of insurance firms to work out how they would cope with volatility and asset shocks that have been anticipated,” he added.

However, he said it would be highly unlikely it had given the same consideration to potential future regulatory regimes.

“I would doubt it has thought about it in any more detail than what we’ve been discussing,” said Maddock.

In a statement, Lloyd’s Chairman John Nelson said it was naïve to think the UK would be able to renegotiate new agreements with Europe overnight that would give market practitioners the same level of access.   

“If we were to leave the EU, we would have no right of access to the EU markets without signing up to EU regulations,” he said.

“As regards negotiating bilateral trade agreements to replace the umbrella the EU provides with many countries, it is unrealistic to expect the UK to be able to put itself in the same position as the EU trading bloc with these countries. Again, these agreements – of which there would need to be many – would take many years to negotiate.

“Many of these assertions are being made by those, who have little up to date working knowledge of trade relationships and agreements – something which our team at Lloyd’s are involved in globally, every day of the week. And for those that say we would have less regulation if we came out of the EU, I say there will be no regulatory nirvana.

“If we wanted to maintain our trade with the EU, we would have to comply with EU regulation in any event, and I see no sign that the UK regulators themselves want to deregulate – in fact, regrettably, I see signs of the opposite.”