The UK joined the European Union in January 1973, and yesterday, the UK public voted to leave. After 43 years of marriage, the divorce proceedings will soon begin.
No one knows how long it will take for the UK to untangle itself from the EU and its laws, but many commentators think it will take many years – at least a decade. Crucially, no one yet knows how Brexit will affect the City of London – the UK’s financial center.
The EU’s single financial passport, or passporting, allows re/insurers and other financial services companies the ability to conduct business across EU member states, establishing branch offices through one regulator in the UK
What will happen to the single passport when the UK’s membership of the EU expires in two years? While Article 50 of the 2009 Lisbon Treaty sets out the process of withdrawal for an EU member state, it’s never been triggered.
The procedure is this: when the UK prime minister notifies the EU about Britain’s intention to withdraw, negotiations will begin on the arrangement for leaving and for the UK’s future dealings with the remaining 27 member states. The Lisbon Treaty allows for up to two years of negotiations. If no agreement can be reached in this time period, the other member states either have to unanimously agree to extend the negotiation period, or Britain will have to exit with no deal in place.
Prime Minister David Cameron today announced his resignation, making way for a Tory leadership election to be completed by October. Cameron said he will let the new prime minister invoke Article 50.
The question of continued access to the single EU passport is a matter to be resolved in these negotiations.
Lloyd’s, the International Underwriting Association, the Association of British Insurers, Standard & Poor’s, the legal firm Clyde & Co., Allianz, and other financial services and re/insurance groups have begun to weigh in with their comments about this historic vote.
A wrap-up of their comments follow, in no particular order:
- Lloyd’s of London. “I am confident that Lloyd’s will stay at the center of the global specialist insurance and reinsurance sector, and I look forward to continuing our valuable relationship with our European partners,” Lloyd’s Chairman John Nelson said. “For the next two years our business is unchanged. Lloyd’s has a well prepared contingency plan in place and Lloyd’s will be fully equipped to operate in the new environment.”
- International Underwriting Association. The London insurance market “is resilient and well-positioned to respond to the result of the referendum on the UK’s membership of the EU,” said a statement from the IUA, which noted that there will now be an extended period of negotiation to determine the exact terms upon which the UK exits the EU.
“Clearly the UK’s decision to exit the EU presents challenges for London market companies and uncertainty surrounding the potentially prolonged nature of this process will be problematic for future planning. Our industry is, however, experienced in responding to change,” said Dave Matcham, chief executive of the IUA.
“The free trade benefits of EU membership have been vital in maintaining London’s position as a global insurance hub and are highly valued by IUA members. This is true both for insurers headquartered in the UK and those international firms that use London as their center for European business,” he added.
“We know that many companies will now be considering their own individual responses. Continued access to European markets is essential and will, I expect, be at the forefront of the process to respond to the referendum decision. The IUA will be working with the London Market Group to ensure our industry’s views are fully represented as developments continue,” Matcham went on to say.
“Outside the EU it will still be desirable for UK supervisors to have reciprocal arrangements in place with other national regulators. Otherwise we will see a duplication of compliance costs that will damage companies and escalate costs for clients.”
- Standard & Poor’s. S&P Global Ratings said the leave vote is not expected to lead to rating actions on U.K. insurers. “We see the insurance sector as less exposed to the leave vote than the rest of the financial sector.”
The insurance sector represents about one-third of the U.K.’s financial services net export surplus, but it is more reliant on trade with non-EU countries – especially the U.S., said S&P, noting that the sector is also a “very limited recipient of inward investment.”
“Even in the absence of any trade agreements or passporting rights, we believe that U.K. insurers operating in the EU could, through appropriate planning, continue their businesses largely uninterrupted. The same would apply for EU insurers who currently trade in the U.K. through branches,” said S&P.
The ratings agency acknowledged that there will be a period of uncertainty while treaties or other arrangements are negotiated between the U.K. and the EU, which could weigh on insurers’ investment returns and possibly on the rate of future economic growth. “However, we do not now believe that these potential issues are likely to lead to immediate rating actions on insurers.”
- Association of British Insurers. “The UK insurance and long-term savings industry is strong and built to protect customers from market uncertainty and shocks,” said Huw Evans, director general of the ABI.
“Customers should remember we remain part of the EU until the process of leaving is complete and they should therefore avoid hasty decisions about their financial matters. For the UK government, it will be important now to focus on ensuring the UK remains a globally competitive place to do business with the best possible future trading network with the EU and the wider world,” he added.
- British Insurance Brokers Association. BIBA said it will work with government and other authorities to ensure the best interests of insurance brokers and their customers are fully represented during the exit negotiations. “This is an unprecedented situation for the UK and BIBA is conscious that this will create a considerable amount of work and concern amongst members and their customers,” BIBA noted in its statement.
- City of London Corp. “The City of London has thrived as a financial and trading centre for more than a thousand years and will continue to do so,” said Mark Boleat, policy chairman of the City of London Corp. “There will be no mass exit of banks and financial institutions from the Square Mile.” Boleat admitted there will be uncertainty as Brexit negotiations go on, but the City of London is “still the financial centre of the fifth-largest economy in the world.”
The task ahead is to “secure the best deal we can in the negotiations that will follow this vote,” he said. “The general view of the city is that the government should push for the UK to retain our access to the single market. Any other option will fail to provide proper arrangements for financial services and risks damaging this vital industry.”
- Association of Insurance and Risk Managers in Industry and Commerce (Airmic).The Confederation of British Industry (CBI) revealed prior to the referendum that only 50 percent of FTSE companies had made contingency plans for an exit vote with levels of preparedness varying significantly across the sectors, said Airmic, the UK’s risk management association, in a statement issued today in response to the Brexit vote.
“As with any risk that might affect the whole organization, Brexit is an enterprise risk and the potential impact should be broken down by considering different areas of the business and the relevant risks including people, sales, regulation, law, finance, information, technology and insurance,” said Julia Graham, deputy CEO of Airmic. These principles of a resilient organization are outlined in the Airmic’s “Roads to Resilience” report.
- Clyde & Co. Andrew Holderness, global head of Corporate Insurance Group at Clyde & Co., the London-based, global legal firm, offered some suggestions about what re/insurance businesses can expect after Brexit and their next potential steps.
Insurers, reinsurers and intermediaries “need to review the scale of their operations from continental Europe into the UK, or vice versa, and determine what impact losing it might have on their overall balance sheet. If it’s critical, or if they want to continue writing it, they have a number of options: acquiring another business to provide the right platform, establishing a branch or subsidiary – or finding another business to front for them,” he said, noting that if operations are marginal, the sale of the renewal rights or a portfolio transfer should be considered.
“Without passporting, the level of regulation will undoubtedly rise. It is also very likely that the overall demands on the regulators themselves will increase significantly. This will then have knock-on effect and could impact their speed of response to a range of issues such as requests for approvals and rule waivers or modifications,” Holderness said.
The status of employees also must be considered – whether they are utilizing the free movement of citizens regime permitted under EU law. Holderness suggested that companies conduct an audit to identify which members of staff are affected and whether than can remain in their posts following the vote.
“Alongside the greater administrative burden, there may well be increased employment costs. It is important to align this work very closely with decisions on possible structures, so that any changes to the organization designed to secure ongoing access to markets take into account how that might affect the location of senior management and other staff,” he continued.
- Allianz. “Today is not a good day for Europe,” said Allianz in a commentary titled “Britain Votes to Leave: A Leap in the Dark.” Allianz went on to say that repercussions from the Brexit vote will be felt for years to come in the U.K. and across Europe because Brexit is a process, not an event, and will sap the EU’s political energy for many years.
“In the short run, we expect severe financial market turmoil, compounded by political instability in the U.K. Heightened uncertainty will reduce U.K. GDP growth by 1-2 percentage points per year while London and Brussels seek to come to an agreement about a new bilateral relationship. Unilateral decisions by the UK, e.g. to restrict EU migration, would prompt retaliation and would make negotiations even more difficult.”
By acting in a collaborative manner, “British and European policymakers can do much to reduce any disruptions to trade and capital flows,” said Michael Heise, Allianz chief economist. “Even if the European project from now on will move forward without Britain, the UK is bound to remain a key ally of the European Union warranting close political, economic and financial ties.”
- Insurance Europe. “We are deeply saddened to hear that the people of the United Kingdom have voted to leave the European Union. We now hope that policymakers can work quickly to limit the impact that this time of uncertainty will have on both consumers and businesses,” said Sergio Balbinot, president of Insurance Europe, the Brussels-based European re/insurance federation.
Insurance Journal will continue to provide updates and commentaries on the Brexit vote in the coming days and months.
- Update: Britain Votes to Leave EU; Prime Minister Cameron Resigns
- Brexit Would Create Extra Burden for Reinsurers, Caution CEOs
- ‘Brexit’ Would Damage UK’s Leadership Position in Insurance: Aon
- Future of London Market Threatened by ‘Brexit’, Warn Market Leaders
- ‘Brexit’ Will Create Real ‘Risks & Uncertainties’ for Lloyd’s & London Market
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