The Bell rings twice: UK insurers take up the Brexit challenge

Lloyd's paid out when the Titanic sank and after the San Francisco earthquake in 1906. Then there were hurricanes, terrorist attacks, tsunamis. One might think that there is nothing British insurers haven’t seen and withstood over the course of their long history. However, the aftermath of the Brexit referendum on 23 June 2016 was unprecedented, even for an industry that makes catastrophes its business. It’s not just Lloyd's, the whole sector has had to adapt since the UK decided to leave the European Union. At the end of 2020, the transition period will expire, EU law and the old certainties will then no longer apply. “Access to the EU market was the standard for decades,” says Laura Scarpa of Deloitte in London. “The industry is facing major challenges.”

A large market

With EUR 307 billion (2019) in premium volume and a 5.8% share of the global market, the UK is Europe’s largest insurance market according to the Swiss Re Institute and number four globally – behind the US, China and Japan. British insurers currently employ over 320,000 people and contribute GBP 34 billion to the British economy annually. Free access to the European single market is not inconsequential to this success. As with all insurers based in the EU, the UK market has hitherto been part of the European Passport principle, whereby if a company is licensed in an EU member state, it can automatically operate in all the other member states as well. As part of this system, the UK developed into one of the biggest exporters of insurance services. The latest calculation of the volume of exported business is over EUR 16 billion, which even exceeds the US, the world’s biggest insurance market, which posted EUR 14.7 billion (2016) of exported business. UK-based insurers (including UK subsidiaries of international insurance conglomerates) generated just under 30 percent of their turnover in the EU.

35 British insurers have founded branch offices in the EU

This business suddenly became jeopardised due to Brexit. Companies were forced to adapt their business models. And they moved fast. “Insurers have really worked hard to prepare for the end of the transition period,” says Carol Hall, Head of European and International Affairs at the Association of British Insurers (ABI) in London. For example, 35 British companies set up subsidiaries in the EU and an estimated 29 million insurance contracts have already been transferred to the new EU branch offices. Lloyd's opened an office in Brussels to preserve its access to the EU market. Motor insurer Admiral now runs its European business from Madrid, holiday home insurance provider Intasure moved to Sweden. European customers are supposed to hardly notice the difference – at least that's how the British insurers see it.

High insurance density

“They’ve prepared well for all eventualities and informed their customers in detail about the changes,” says association spokeswoman Hall. However, the transition may prove more awkward for British customers: they can’t be sure that their motor or health insurance still applies in the EU. Moreover, the Brexit preparations have proved a costly exercise for British insurers. The establishment of a parallel organisation within EU borders subject to a different regulatory regime than the parent company over the medium term is a costly process that pushes many smaller providers to the limit or may even just not be worth doing. As a result, some UK insurers have decided to withdraw and divested themselves from existing contracts with EU customers.

There is currently no national UK regulation

Special providers are exploiting the situation, for example the German insurer and reinsurer Darag, which specialises in taking over discontinued business. In fact, Darag announced the acquisition of its British competitor The Underwriter last year in order to improve its access to the anticipated business. It remains uncertain how the British insurance market will look in future. One thing is for sure: the EU Solvency II standard will be replaced by a British regulation that will initially stick to the current provisions. Companies and associations have until 19 January 2021 to submit future regulation proposals to the Ministry of Finance in London.

World leader

Industry insiders do not anticipate a major change. EU regulations are too entrenched in UK law to simply disappear in the short term, says Deloitte expert Scarpa: “Most of the EU legislation will stay with us for a while yet.” Moreover, companies have no real interest in quickly bringing in different standards and adding another layer of compliance to transactions between the EU and United Kingdom. Nonetheless, the standards may well drift apart over the long term. “The UK’s departure from the EU is an opportunity to amend regulations and tailor them to the British market,” says Peter Thomas from PwC in London. One discussion point will be whether and, if so, how to simplify financial reporting. German and other European insurers are concerned that their competitors in the United Kingdom may gain a competitive advantage for business outside Europe by virtue of having less stringent regulation and taxation.

British insurers also hope to benefit from leaving the EU

Having spent more than four years preparing for this outcome, most British providers are looking forwards, not backwards. “Most companies have made good use of the interim period,” says Deloitte consultant Scarpa. Innovative products and new tech applications will drive growth. Lloyd's of London, for example, runs Lloyd's Lab, where InsurTechs can work on their digital solutions for the insurance sector. Industry insiders expect positive outcomes from Brexit. British providers could generate more new business, for example. EU insurers departing the British market to avoid the added administrative burden will leave gaps behind. “It just won't be practical for some EU market participants any longer. That could free up significant market share and provide acquisition opportunities to providers with a stronger presence in the UK,” says PwC Director Thomas. The new EU offices could also gain new business in Madrid, Brussels or Frankfurt.

“Our place is at the front of the flotilla,” said Lloyd's boss John Neal in his inaugural address in 2019. He will do all he can with his colleagues to ensure that the post-Brexit era gives plenty of reasons to ring the Lutine Bell twice.

Nicola De Paoli