A.M. Best: Insurers Must Consider Risks of U.K. Exit From European Union

April 8, 2015

Insurers based in the United Kingdom underwriting a material amount of European business should be monitoring the potential consequences of the United Kingdom exiting or renegotiating its position within the European Union (EU), according to an A.M. Best briefing.

One such consequence could see European competitors taking advantage of the uncertainties in the next few years to attract business away from U.K. insurers, said the briefing titled, “Insurers Must Consider Risks of U.K. Exit from the European Union.”

A.M. Best expects companies with a large European presence to have various scenarios on their risk registers ahead of the U.K. general election on May 7, 2015. In A.M. Best’s opinion, although the United Kingdom’s position within the EU remains ambiguous ahead of the general election, insurers should be proactively considering the implications to their businesses.

“Insurers should identify the potential consequences of operating without the EU financial services ‘passporting’ scheme,” said Catherine Thomas, director, analytics.

“As the scheme allows a company authorized in one member state to conduct cross-border business without being required to apply for any additional authorization or incurring further local operational costs, pulling out of the EU could result in the need for U.K. insurers to establish an EU-domiciled subsidiary to underwrite business there, with subsequent costs, back office operational requirements and resourcing implications,” she added.

Factors likely to influence A.M. Best’s ratings on U.K.-domiciled insurers would depend on the amount of business a company underwrites in the EU and its ability to continue to access this business.

A large group may be willing to restructure and establish an EU-domiciled subsidiary, said the briefing, noting that this could lead to the diminishing importance of its U.K. operation to the overall group.

Issues considered would include whether it is cost effective to set up a new operation, the ongoing strategic importance of the U.K. subsidiary to the group and if any financial implications could affect overall group performance, A.M. Best said.

“In the event of an exit, risks would likely be mitigated to an extent as any withdrawal would be managed over a number of years to avoid disruption,” added Yvette Essen, director, industry research – Europe and emerging markets, and author of the briefing.

“Nevertheless, the viability of London as a key financial center and the impact on the economy must also be considered in the event of a U.K. exit,” Essen continued.

Source: A.M. Best Company

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