A “landmark decision”, “unchartered waters”, “challenges ahead” – the cliché machine has been in full swing since Theresa May finally put pen to paper on Article 50 and kick-started the process of Britain leaving the European Union. However, when we shift past the bog standard lingo, what does the invoking of Article 50 actually mean for the insurance industry?
On the move
For one, we know that it means several insurance firms will be setting up bases in mainland Europe in a bid to combat the potential loss of passporting rights. Today, Lloyds of London finally declared that its destination would be Brussels; while around a month ago, AIG declared its intentions to move some operations to Luxembourg. More will inevitably follow and jobs will surely be shifted from the UK even if the bulk of insurers are playing down this possibility at the moment.
That means that the UK is going to need to move fast to sort out its passporting process asap, and well ahead of the finalisation of Brexit, according to Simon Woods, insurance partner at EY – failure to do so could mean serious disruption because the insurance industry isn’t going to sit idle.
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“Inbound passport holders need confidence from UK regulators that they can continue to operate post Brexit. Unless continued access is negotiated, the ability to passport between the UK and other EEA states will be lost,” he said. “Insurance firms currently holding an inbound branch passport would therefore have to apply to the PRA for authorisation in order to continue trading in the UK. Obtaining authorisation is a substantial process, and we expect it would have to be largely completed before the outcome of Brexit negotiations is known.
“By providing early clarity to insurers and seeking to avoid cost and inefficiency in the authorisation process, UK authorities have the opportunity to minimise disruption in the domestic and international insurance markets due to Brexit. The same authorities can also develop the reputation of the UK, and the London insurance market in particular, as a business-friendly domain.”
The other option – portfolio transfers
Another option, as we discussed in depth with Building Block CEO Paul Brierley earlier this month, is to consider a portfolio transfer – an option he believes is particularly well-suited for smaller insurers and brokers. However, according to Simon Woods, this is an option that is not without complexity.
“Insurers need to consider whether they need to transfer their back-book into the new company,” he explained. “This may be required for a number of reasons, including ongoing permissions to continue servicing of insurance business, minimising frictional costs and ensuring the new company is profitable from day one.
“A portfolio transfer adds additional complexity, cost and time to the process. The main concerns are the capacity of the courts, regulators and independent experts to process the anticipated number of transactions, as well as the costs of policyholder communication, especially for personal lines business in life and non-life business.”
What can they expect on the continent?
We’re always told that we have it hard here in the UK and that we face charges much higher than across the rest of Europe – but is that really the case? Hiscox has issued a ‘starting business guide’ for companies setting up in Europe post-Brexit that lifts the lid on some of the charges they can expect.
Among the highlights of its report are that a typical rental rate per square metre in London is £767 – placing it ahead of Paris at £657 and Berlin at just £270. Corporation tax is significantly lower here, however, at 20% compared to 30% in Germany and 33.3% in France. London is also well ahead of its French and German counterparts in the World Bank’s ‘start a business rating’ – standing in 10th place compared to Paris in 17th and Berlin in 50th.
Pressure on the government
What most commentators can agree on is that Article 50 still represents the great unknown – and the emphasis is on the insurance industry to pile pressure on the government to deliver on its expectations and provide a clear path in regards to a number of contentious issues.
“Solvency II and the Insurance Distribution Directive are two key areas on which the industry will be looking for clarity in the coming months,” noted Jane Portas, insurance regulation partner at PwC. “If changes are made to existing and planned regulation, the industry will expect the government to do everything possible to ensure the UK gains some form of mutual recognition allowing for equivalence, and that it remains a global hub for insurance, including participation of EU insurers.”
“Brexit is an opportunity for the insurance industry to reassess growth opportunities in Europe and elsewhere,” said Benedict Reed, executive director of insurance at EY. “The cost and complexity of establishing a subsidiary gives insurers and reinsurers an incentive and opportunity to grow their businesses in Europe.”
Perhaps then after wading through all the clichés, there is one that stands truer than all others – the time for talk is over, the time for action is now.
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