Brexit deal rejection could hurt U.K. insurance market
The development arrived amidst the U.K.'s already sour financial outlook. Here's what it means for insurers.
Uncertainty mires the United Kingdom’s future trading relationship with the European Union since the House of Commons rejected Prime Minister Theresa May’s Brexit deal earlier this week.
The development arrived amid an already sour financial outlook for the U.K. as economists predict Brexit will reduce the country’s per capita income, and the average U.K. household suffers under increased inflation to the tune of about £404 (or $636) in lost annual income.
Shaky insurance outlook
Historically, Lloyd’s, the London market and other U.K.-based commercial insurers have underwritten European Economic Area (EEA) business on a cross-border basis, according to the global rating agency AM Best. If the U.K. withdraws from the EU without a deal, however, U.K.-based insurers may no longer be able to issue insurance contracts in the EEA.
In order to continue to provide insurance services to EEA customers post-Brexit, many affected companies have chosen to establish new EU subsidiaries. Others, particularly small insurers that do not have the resources to create additional companies, have formed relationships with local carriers that will be able to front business for them.
Expert forecasting
AM Best said today that it expects rated insurance groups to have subsidiaries or arrangements in place by the end of March 2019, which will ensure they are able to underwrite EEA business going forward, even in the absence of a trade deal between the U.K. and the EU. It is possible that if there is no trade deal, U.K. insurers will not be able to service existing contracts in certain EEA countries by settling and paying claims, according to AM Best. To be sure, the insurance industry as well as numerous other businesses remain hopeful that that a political solution will arrive. But affected insurers have been launching contingency plans to manage their operational and legal responsibilities throughout the EEA.
AM Best says most insurance groups have either completed or initiated a transfer of their EEA business from their U.K. insurer to an affiliated EEA insurer under Part VII of the Financial Services and Markets Act 2000. However, the Part VII transfer process is expensive and time consuming, with transfers subject to extensive regulatory scrutiny and court approval. Consequently, a number of Part VII transfers will not be complete by the end of March 2019.
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