According to FERMA’s European Risk and Insurance Report 2016, political and country instability is the 3rd biggest risk facing risk managers across Europe. Brexit is one of the biggest political risks the EU has ever encountered and has implications for insurance and risk management for years to come.
March 2017 saw the 60th anniversary of the Treaty of Rome and the signing of a new Rome Declaration setting out a vision for the future of the EU without Britain. Following its vote to leave the EU in June 2016, the EU’s 28 members will reduce to 27 in March 2019.
Brexit and the insurance market
The impact of Brexit will be felt by companies across the world – UK businesses, global organisations with major investments there, and EU companies trading with the UK will all be affected. The decision to leave the world’s richest trade market brings unpredictability in terms of trade, access to EU workers, cross-border supply chains and regulation, with the disruption lasting for many years. Contingency planning is difficult until exit negotiations are complete, and if a new trade agreement has to be agreed, could take many years to finalise.
Financial services will be one of the hardest hit industries, accounting for about a third of total UK exports to the EU. UK-head quartered financial services companies are investigating where to set up new operations to reassure regulators they can maintain continuity of service to clients if the UK leaves the single market and lose its associated passporting rights. EY’s Brexit Tracker shows that 59 of the 222 financial services companies it’s monitoring are reviewing their primary location or have started moving business out of the UK, with Frankfurt and Dublin the most popular alternatives so far.
The London-based insurance market, which uses passporting rights extensively to service clients across the EU, is also on the move. European insurance buyers will be making more trips to Luxemburg and Belgium post-Brexit, with AIG, RSA and Hiscox choosing Luxemburg, and Lloyd’s of London turning to Brussels. Lloyd’s has said that it expects its new base to be ready for January 2019 renewal season.
In terms of planning for renewals, the two-year notice period to leave the EU gives both insurers and the insured the time to amend one year, and most three year, policies on renewal, or plan for any amendments required. However, buying insurance could become more complicated if the new UK licensing regime requires changes to insurance contracts. Currently the UK permits local risks to be insured from outside the UK on a non-admitted basis, apart from statutory policies which must be insured within the UK. As yet we don’t know if the UK will continue to permit non-admitted insurance.
Some European countries already require EU issued policies for the risks insured in that country and do not permit these risks to be insured in a non-EU country. Global insurers with EU licences will be able to continue underwriting these risks, so the impact on administering corporate insurance programmes may not be significant in terms of cost or resource.
Brexit is also unlikely to affect the price of insurance. In recent years the key drivers of cost have been insurers’ access to cheap capital, and a relatively benign claims period without significant insured catastrophic losses. It’s unlikely that Brexit will change this picture.
Risk managers should be talking to their insurers and brokers about how their business will be impacted, especially if contingency plans could result in a material change to the risk profile of the company e.g. if projects are deferred until key decisions have been made.
People risk is a major concern for companies with a reliance on staff from the EU or UK. If EU citizens are no longer able to work freely in the UK (and vice-versa) then businesses may suffer staff shortages and/or the loss of key personnel. The number of EU nationals entering the UK to work has already dropped, hitting the public sector, agriculture and hospitality the hardest. Companies need plans on how to deal with labour and skills shortages, whether by retaining older workers, investing in retraining, or improving terms and conditions to attract new recruits.
For key personnel, AIG has recently extended its D&O policy to cover legal challenges in the event of permanent residency applications being rejected pre-Brexit, and the subsequent challenges to repatriation orders post-Brexit. This also covers legal costs for executives living in the UK and EU to fight a repatriation order as a result of termination of the UK’s EU membership.
Companies facing significant upheaval as a result of Brexit should make sure they have robust D&O or PI protection in place, should they face claims they have failed to properly prepare or advise clients. Shareholders will expect boards to understand the opportunities and threats from Brexit, and implement plans to ensure the future of the business. Risk Managers should take advantage of the fact that business risk is high on the corporate agenda and present different scenarios to encourage discussion and inform decisions.
The impact of Brexit is still a massive unknown but the real danger is that companies stand still whilst waiting for clarity.
To discuss the latest Brexit developments and what it means for insurance programmes and risk management, please visit our stand at the FERMA Risk Management Forum in Monte Carlo.