What Brexit means for the US insurance market

The surprise vote could dislodge the UK’s leadership in the industry – but is the American market ready to take its place?

Insurance News

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The surprise decision by UK voters Thursday to leave the European Union sets the stage for short-term economic strain on the US insurance industry, but could benefit the market in the future, analysts say.

Long the global hub of the insurance market – as well as one of America’s largest trading partners – the UK stands to lose its dominance following the historic referendum. Despite early indications that voters would choose to remain in the EU, 51.9% of those who cast ballots chose the “Leave” option against 48.1% for “Remain.”

The vote quickly sent shockwaves through global markets, with the pound plunging to $1.35 – its lowest level since 1985.

Yet the US economy is better insulated than most from the risk associated with this market turmoil. Major banks are better capitalized than they were a decade ago, when the Lehman Bros. bankruptcy triggered the global financial crisis in 2008.

And according to David Snyder, vice president of policy development and research for the Property Casualty Insurers Association of America (PCI), severing ties with some restrictive EU regulations may prime US insurers to prosper more fully overseas than they have in the past.

“There’s value in a European common market, in the ability to be admitted once and operate all throughout the EU,” Snyder said. “On the other hand, Solvency II is creating problems for US insurers [operating] in Europe.”

Solvency II is an EU regulatory regime that imposes a restriction deeming the US as a non-equivalent regulatory environment.  With increased governmental regulation and a higher operating cost for US insurers in the EU, Solvency II is disadvantaging US-based companies, Snyder said.

“Solvency II is starting to close markets that have been open to the US,” he said.

Because of that, the benefits associated with the uniformity of EU rules are actually being undermined by the new regulation.

Not all industry analysts are buying Snyder’s take on Brexit, however.

Economist and Insurance Information Institute President Robert Hartwig has said the removal of Britain from the EU could set up a “domino effect” in which other countries break off from the group.

“There’s nothing good in that,” said Hartwig. “The uncertainty [of the Brexit] would certainly decrease capacity.”

US insurers operating in the UK tend to agree. Many of these companies rely on EU reinsurers, including Lloyd’s of London, Munich Re, Hannover Re and Swiss Re Group, and a financial hit to these groups could limit the amount of risk carriers are willing to take on.

In addition, a rising number of companies have opened branches and moved major parts of their operations – even whole headquarters – from the US to the UK. With the expected hit to the UK market, these companies’ positions are precarious as they lose the ability to passport services into Europe, which could send operational costs skyrocketing.

The most prominent of these companies is Aon, the world’s largest insurance broker, which moved headquarters from Chicago to London in 2012. Aon has warned that Brexit will mean a potential move from London into the EU, as it will not be able to provide the same coverage options in the face of new trade barriers. A “brain drain,” as financial professionals leave the city, would also be detrimental to the company as it seek to bring on new talent, said Chief Executive Greg Case.

“In our world, risk is inevitable and we manage it accordingly,” Case wrote in a letter posted to Aon’s website. “But leaving the EU is an unnecessary gamble.”

Another US-based insurance giant, American International Group, has said it will consider establishing an operations center beyond the UK as a result of the vote.

Speaking at a seminar in London earlier this month, AIG Chief Executive Peter Hancock told listeners that the UK remaining in the EU was the best outcome for the industry. AIG, which received a widely publicized government bailout when faced with similar financial pressures in 2008, may also explore a new European hub for its operations.

All told, the benefits do not outweigh the regulatory challenges and financial uncertainty of Brexit, Hartwig said.

“It’s hard to predict, except that it would be worse,” he told Bloomberg.


Related Stories: 
Insurance industry speaks out on Brexit result
Brexit voting closes – early poll results in
 

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