Brexit: How Will Multi-National Insurers Sort it Out
This article is written by Mitch Wein and reprinted courtesy of Insurance Networking News
Yesterday, the UK voted to leave the EU. Nigel Farage, the UK Independence party head, declared it “Independence Day”. What does this mean for multi-national insurers? The impact is far reaching.
Consider regulations regarding data, financial product definitions, privacy, and the overall regulatory framework including capital requirements. Access to Europe’s single market, some 500 million people will be impacted by tariffs which will be placed on transactions over the existing VAT. And what about employees that come from the EU and work in London? What will be their status going forward? Let’s look at some specific areas:
Lloyd’s of London has worked in a single market, confirmed by the Solvency II regulations, for many years. The Prudential Regulatory Authority (PRA), a UK-specific regulator, has been allowed to regulate Lloyd’s across all of the EU countries through a “passport permission system”. This allowed Lloyd’s to write business but not keep funds and capital reserves in those other countries to meet future insurance liabilities in those countries. Using this approach, combined with Letters of Credit and Bank Guarantees acting as “regulatory capital”, actual capital can be placed in the most efficient way across the continent. Regulatory reporting just has to be done to the UK PRA, and not other regulators in other EU countries. This will all go away with Brexit unless a treaty is signed country by country to allow this approach. Even Solvency II itself may change when the UK designs its own specific version of the law, which it will have to do.
The concept of Home state “passports” with home state regulatory supervision is used by carriers and brokers across the EU. There will now be multiple regulators, multiple reserve requirements per country, currency risk, additional tariffs and additional regulations impacting product design. In the new reality, the benefits of the London market dissolve unless they are added back, country by country. This will take years and will result if differences across each country. Potential higher capital requirements in the UK vs. the EU may mean from financial products offered by multi-national insurers to people on the continent may not be offered to people in the UK.
All multi-nationals insurers hire people from different countries and move them around. This is especially true for the top continental insurers. However, the immigration status of EU citizens in the UK or likewise UK citizens in the EU is now undetermined. This may force multi-nationals to move certain businesses out of the UK in order to retain key talent. The increase in UK taxes that is expected will also act as a disincentive to people who may have considered moving to London.
Brexit highlights the importance for global companies of maintaining flexible, globalized IT operations to be able to handle unforeseen events. Each multi-national insurer should be doing comprehensive contingency and risk planning and maintain flexible operations that can be moved if needed. Products and services need to be designed in a way that the customer is insulated from major events in order to retain confidence. Back-office operations need to have the flexibility and capacity to move people and processes globally.
However, every cloud has a silver lining. The Governor of the Bank of England has said there will be higher interest rates in the UK. This will partially offset the higher regulatory cost since capital will be able to make more money.
Watch for volatility in multi-national insurer share prices, especially those with UK products and operations.