Brexit Impact on UK Insurers Dictated by Trade Talks, Possible Economic Hit: AM Best

January 30, 2020

From an operational point of view, the United Kingdom’s departure from the European Union on Jan. 31, 2020 will have little immediate impact on AM Best-rated insurers in the UK or EU, according to the ratings agency in a new report.

Any longer term impact will be dictated by the outcome of trade negotiations and decisions about regulatory equivalence between the UK and EU as well as hits to the UK economy, said the report titled “Brexit Bells Ring for UK and EU Insurers.”

AM Best said it has been monitoring insurers’ contingency plans once passporting rights are lost following the UK exit from the EU.

Passporting Rights

During the 11-month post-Brexit transition period, UK insurers will be able to underwrite European Economic Area (EEA) business via existing passporting rights and EEA insurers will retain access to the UK market, noted AM Best.

However, at the end of 2020, passporting rights that currently exist between the UK and the EEA are expected to cease, and UK-domiciled insurers will no longer be able to issue insurance contracts in the EEA, the report explained.

“Most UK-domiciled insurers that have made use of passporting rights, such as Lloyd’s, London market and other commercial lines writers, have already put in place arrangements to ensure that they are able to continue EEA operations at the end of the transition period,” it added.

While many larger companies have formed new EU-domiciled subsidiaries, some smaller insurers without the resources to create subsidiaries or branches have formed relationships with local carriers that will be able to front business for them, the report said.

For most retail non-life and life insurers, the loss of EEA passporting rights is not a major issue as they mostly underwrite domestic business or, in the case of large life insurers, have subsidiaries in both the UK and at least one on the 27 EU countries, the report continued.

“EEA insurers currently using passporting rights to operate in the UK will have time to adapt. In 2018, HM Treasury published a statutory instrument setting out a temporary permissions regime (TPR) allowing EEA insurers to continue to operate for up to three years after the UK’s withdrawal from the EU,” the report said.

Equivalence Considerations

The long-term implications of Brexit on UK insurers will depend on the outcome of any negotiated trade deal between the UK and the EU during the transition period and whether the European Commission deems the UK’s solvency and prudential regime “equivalent” under Solvency II. AM Best believes that the UK is well placed to achieve Solvency II equivalence.

“[The UK] was at the forefront of crafting the Solvency II framework and, even after the transition period ends, UK and EU insurance regulators will likely share many common regulatory priorities, challenges and concerns,” the report continued.

While there is potential for solvency and regulatory requirements in the UK and EU to diverge, “this would not necessarily preclude the UK from achieving Solvency II equivalence,” AM Best affirmed.

“The UK government has stated that it wants financial services to trade with the EU on the basis of ‘outcome-based’ equivalence of rules,” according to the ratings agency. “This is consistent with the European Commission’s July 2019 communication on equivalence in the area of financial services, which states ‘third-country regimes do not need to be identical to the EU framework, but they do need to ensure in full the outcomes as set out in that framework.'”

AM Best noted, however, that equivalence is reviewed regularly and can be withdrawn.

Economic Effects

AM Best said it expects little operational impact on UK risk carriers, given their extensive contingency planning, but they could be affected by hits to the UK economy, at least in the short term.

“Potential issues include a further weakening of sterling, which could increase claims inflation, and an increasingly challenging investment environment. If economic conditions deteriorate, the demand for insurance is likely to reduce, which would have negative implications for premium volumes.”

Source: AM Best

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