Brexit: What insurers need to know
From an operational point of view, the United Kingdom’s (UK) departure from the European Union (EU) on 31 January, 2020 will have little immediate impact on AM Best-rated insurers in the UK or EU, according the rating agency AM Best’s latest report.
During the 11 month post-Brexit transition period, UK insurers will be able to underwrite European Economic Area (EEA) business via existing passporting rights and EEA insurers will retain access to the UK market.
At the end of the transition period, passporting rights that currently exist between the UK and the EEA are expected to cease, and UK-domiciled insurers will no longer be able to issue insurance contracts in the EEA.
EEA insurers currently using passporting rights to operate in the UK will have time to adapt. In 2018, HM Treasury published a statutory instrument setting out a temporary permissions regime (TPR) allowing EEA insurers to continue to operate for up to three years after the UK’s withdrawal from the EU.
Looking past the transition period, the operational implications of Brexit on UK insurers will depend on the outcome of any negotiated trade deal between the UK and the EU, and whether the European Commission deems the UK’s solvency and prudential regime “equivalent” under Solvency II.
Although AM Best expects little operational impact on risk carriers, given the extensive preparation to date, all UK insurers are likely to be affected by the impact of Brexit on the UK economy, at least in the short term. While the effects are difficult to predict with any degree of certainty, they are likely to be negative.
Potential issues include a further weakening of sterling, which could increase claims inflation, and an increasingly challenging investment environment. If economic conditions deteriorate, the demand for insurance is likely to reduce, which would have negative implications for premium volumes.
Most UK insurers have undertaken analysis to test the resilience of their capital positions to a range of disorderly and disruptive Brexit scenarios and, in some cases, have restructured investment portfolios or put specific hedges in place.
