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Insurers anticipate big problems if U.K. exits the European Union

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Insurers anticipate big problems if U.K. exits the European Union

A United Kingdom exit from the European Union could challenge the competitiveness of the London insurance market.

Several insurance industry organizations expressed that fear following a pledge by the U.K. Conservative Party, which won the nation's May elections, to hold a referendum on the United Kingdom's membership in the European Union.

The U.K. government said it would call on the European Union to make widespread reforms on issues such as immigration, ahead of the ballot initiative.

Possibly as soon as 2016, voters are to be asked in a binding referendum whether they wish to stay in the E.U. or favor a British exit, known as a Brexit, of the economic, political and trading bloc.

Sources say there would be several significant effects on the U.K. insurance industry should it leave the E.U.

“The main impact on the London-company market of a U.K. exit from the E.U. would be the potential loss of passporting rights for insurers,” said a spokesman for the International Underwriting Association, which represents insurers and reinsurers in the London-company insurance market.

Passporting rights allow U.K. companies to conduct business throughout the European Economic Area - the 28 E.U. member states plus Iceland, Liechtenstein and Norway - under directives such as the Insurance Mediation Directive, the Consolidated Non-Life and Life Assurance Directive or the Reinsurance Directive.

“Under the current system, companies based in London are free to conduct business across all E.U. member states and establish branch offices while reporting only to their home state regulator,” the IUA spokesman said.

“This arrangement is much more favorable than that for insurers based outside of the European Union,” he said. “Companies are not, for example, obliged to maintain expensive capital holdings in each of the E.U. member states in which they are doing business.

“If the United Kingdom were to exit (the European Union), insurers and reinsurers from third countries - such as the United States and Japan - might be obliged to choose other centers over London in order to passport into the European union,” he added.

At a recent event in Luxembourg hosted by Insurance Europe, which represents insurers and reinsurers, Lloyd's of London CEO Inga Beale said Lloyd's believes a U.K. exit from the E.U. would be “bad for business.”

“We think that open trade and being part of a bigger community is very important,” Ms. Beale said.

She said a strong European voice would be important as emerging economies such as China and India grow in importance.

Insurance Europe declined comment on the issue as did Airmic Ltd., which represents U.K. risk managers.

“The real political uncertainty for our sector comes from the dual and interconnected possibility that the United Kingdom could leave the European Union and that the United Kingdom could dissolve if Scotland voted to become independent.” Huw Evans, director general of the London-based Association of British Insurers, said in a speech last week.

During last fall's Scottish independence campaign, several insurers in Scotland urged voters to remain part of the United Kingdom.

Edinburgh-based Standard Life P.L.C., citing competitiveness concerns, said it had drawn up plans to move its business if Scotland voted for independence. It declined comment on the potential impact of the United Kingdom quitting the European Union.

Last September, 55.3% of the Scottish electorate voted to remain part of the United Kingdom, but the Scottish National Party, which favors independence, won 56 of 59 seats in Parliament in May's general election.

“On the E.U. referendum, the industry will be under pressure to have a collective position, and I would certainly expect this to feature heavily in ABI discussions over the coming months,” Mr. Evans said.

The British Chambers of Commerce found in a recent survey of 3,800 respondents that 63% said a U.K. withdrawal would be negative for their business. Fourteen percent said they did not know what the effect would be, 12% said a Brexit would be positive for their business and 11% said a withdrawal would have no effect.

But 55% also said their preferred outcome would be for the United Kingdom to remain within the European Union with significant reforms, including transferring some political powers back to London from the European lawmaking bodies.