What stays – and what goes – in global insurance industry following Brexit

What stays – and what goes – in global insurance industry following Brexit | Insurance Business

What stays – and what goes – in global insurance industry following Brexit
The UK’s historic vote Thursday to leave the European Union prompted several pressing questions for the global insurance industry, which major players are now beginning to answer.

In a rush to assure investors and consumers of their stability, companies from Lloyd’s to XL Catlin have issued statements saying they are fully prepared for the consequences of Brexit, and are equally assured that London will continue as the center for global industry activity.

While the long-term effects of the vote are unknown, Lloyd’s of London Chairman John Nelson stressed that the exit will not take place for two years, and that it is likely to take up to a decade for the UK to repeal all EU legislation and regulations – leaving plenty of time for the industry to adapt.

“For the next two years, our business is unchanged,” Nelson said. “Lloyd’s has a well-prepared contingency plan in place and Lloyd’s will be fully equipped to operate in the new environment.”

XL Group Chief Executive Mike McGavick made similar comments, saying Brexit is “an outcome that we have been preparing for,” and the International Underwriting Association of London called the UK market “resilient and well-positioned to respond to the [referendum] result.”

Already, companies are seeking the ability to passport business services in the EU, a great advantage the UK enjoyed under its membership in the body. So if these efforts win out, and the strength of London’s position in the market will remain – at least after some initial difficulties – how will Brexit change the industry?

Several analysts are looking to Solvency II, an EU regulatory regime that exercises risk-based capital requirements over companies doing business in the EU. Meant to protect insurance buyers, the rules manage capital, governance and reporting for insurers.

David Snyder, vice president of policy development and research for the Property Casualty Insurers Association of America (PCI), sees Britain’s break with the EU as promising for US companies in this regard.

“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.”

Because Solvency II deems the US a “non-equivalent regulatory environment,” the regime has been an issue for companies operating in London and the UK in general.

“Solvency II is starting to close markets that have been open to the US,” he said.
Frank Nutter, president of the Reinsurance Association of America, believes the EU Referendum vote may provide the perfect opportunity to redouble efforts to achieve the free flow of capital and risk transfer in cross-border business, a goal that has been dislodged somewhat by EU regulations.

“The impact of Solvency II, and now Brexit, has fostered some uncertainty for US-based companies doing business in EU countries,” Nutter said in a statement. “In light of the Brexit vote, it is important for the covered agreement negotiations between the US and EU to remain a top and immediate priority among all concerned parties. Such an agreement can resolve uncertainty and set a precedent for future regulatory agreements.”

Yet not everyone agrees that Brexit will mean changes for Solvency II and its application to insurers doing business in the UK. Daniel Bruce, director at Crowe Horwath LLP and co-founder of consulting firm BaxterBruce, expects these requirements to remain, particularly given the UK’s role in the drafting process.

“The UK has been a key player in formulating Solvency II requirement and we expect that the Prudential Regulatory Authority will be keen to proceed on a similar path,” Bruce said, adding that he expects requirements to remain both in the two-year negotiating period and in the long term.
In fact, he anticipates an increase in oversight from regulatory authorities, both from Prudential and the UK’s Financial Conduct Authority.

“In particular, the PRA will be keen on insurance companies ensuring that their stress and scenario testing is up to date and reflective of the current economic and political environment,” Bruce said. “They will expect remedial management actions to be taken, as and where necessary, to maintain ongoing solvency.”

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