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U.S. brokers to feel it more than insurers

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The United Kingdom's vote to leave the European Union looks to have a greater immediate effect on insurance brokers than insurers as the U.S. market has largely taken a business-as-usual stance following last month's referendum.

Despite the vote, observers point out that the U.K.'s withdrawal from the trading bloc is still not guaranteed and that it would take at least two years. Several U.S.-based insurance enterprises responded that they don't intend to change the way they do business in the wake of the decision.

“From the underwriting perspective, there are some E.U. overlaps, but frankly, I don't think the U.S.-U.K. underwriting relationship will be impacted,” said Ashley Craig, a partner in the Washington office of Venable L.L.P. and co-chair of the law firm's international trade group. “At least in the near term, nothing's going to change from an underwriting perspective. We're not certain if this Brexit vote will stick or not, so there's a lot left to be determined going forward.”

While observers said the odds were slim, the U.K. Parliament could overturn the referendum. There was talk last week of launching another vote on whether to stay or leave the economic, political and trading bloc in which what is known as passporting — or being allowed to do business anywhere in the E.U. with regulatory approval of one member country — has furthered services that include insurance.

“It's highly likely that those passporting rights will remain, via the European Economic Area, because the insurance sector is critical to the European economy as a whole,” said Joseph Ferraro, a partner in the London office of Willkie Farr & Gallagher L.L.P. “Even though the regulatory and political situation is currently in flux, London will continue to attract the best and brightest within the insurance industry.

“Basically, most U.S. insurers would only have to establish a regulated subsidiary in one European state and use that as a vehicle for the E.U.,” said Andrew Tromans, another London-based Willkie Farr partner.

In a London address before the vote, American International Group Inc. CEO Peter Hancock left open the possibility that AIG could move its London hub elsewhere in the E.U.

But after the vote, AIG said in a statement: “We will closely monitor the progress of the U.K.'s negotiations with the E.U., and participate in the debate with the government and trade bodies as appropriate. We will continue to evaluate our options as the shape of the future relationship between the U.K. and E.U. becomes clearer.”

Analysts foresee a greater impact on insurance brokers, at least initially.

“The U.S. property/casualty insurers and insurance brokers are probably a relative safe haven given their almost total lack of exposure and relatively little interest rate risk because they do not have spread-based business,” Paul Newsome, managing director at Sandler, O'Neill & Partners L.P. in Chicago said in a research note.

While saying insurers that include Travelers Cos. Inc. would be “insignificantly impacted,” he said global insurers such as Chubb Ltd., XL Catlin and Navigators Group Inc. and global brokers such as Marsh & McLennan Cos. Inc., Aon P.L.C., Willis Towers Watson P.L.C. and Arthur J. Gallagher & Co. “are more impacted in our opinion given their exposure to European currency and economic activity in Europe.”

“The global insurance brokers typically have more of their expenses than their revenues in pounds, so the weaker pound typically boosts margins, helping offset more difficult” foreign exchange issues, Keefe Bruyette & Woods Inc. said in a research note. “On the other hand, lower exposure unit growth and less inflation are revenue headwinds for the brokers.”

“In terms of the U.S. (insurance) market, if the barriers go up in Europe, the clients I deal with have always done business in the U.S., in Latin America, Asia; they can redirect their business to markets they're familiar with,” said Kevin Mattessich, a partner at Kaufman Dolowich & Voluck L.L.P. in New York.

“I don't think you'll see a dramatic change in the short term,” said Daniel Bruce, co-founder of London-based BaxterBruce Ltd., an insurance industry consultant recently acquired by Chicago-based Crowe Horwath L.L.P. “I don't think it would make any sense to do anything dramatic at this stage.”

“In some ways uncertainty could help brokers, because they have to help clients navigate them,” said Julie Herman, director-financial services ratings at Standard & Poor's Corp. in New York. She said a broker's job is to help clients “navigate through destruction.”

Observers also downplayed the impact of the vote on Aon, which redomesticated from Chicago to London in 2012.

Largely echoing Aon CEO Greg Case's comments on the company's most recent earnings call before the vote, Ms. Herman said “there's not that much impact on Aon overall.”

“Aon's incredibly innovative; Aon's got its local brokers,” said Mr. Mattessich. “Do they suddenly get shut out of Germany” if the U.K. leaves the E.U.? That shouldn't happen “unless there's another real vicious trade war, if not a hot war.”

Aon declined further comment.

“The process for exiting the E.U. will take many years, and we do not expect to see any material changes immediately, or expect the way in which we do business, as a firm, or our industry at large, to change,” Itasca, Illinois-based Arthur J. Gallagher & Co. Inc. in a statement.

“London is a critical global market for financial services, insurance and consulting; and it will continue to be core to our operations,” Dan Glaser, president and CEO of New York-based Marsh & McLennan, said in a statement. “Our clients in the region will need our guidance and solutions more than ever to navigate their changing landscape.”

In a statement, Willis said it is “monitoring the situation closely.”