British vote to leave E.U. creates confusion for insurersReprints
Britain's vote to exit the European Union Thursday creates uncertainty for London market and international insurers as they wait to see how the vote will affect their ability to access European markets and use London as a hub for operations.
While insurance leaders expressed confidence that London will retain its status as a leading international insurance market, some raised concerns about issues such as whether insurers based in the United Kingdom will be hindered in their ability to write business throughout the European Union.
British voters approved leaving the European Union by a margin of nearly 52% to 48%. The vote to leave the trading bloc sent stock markets tumbling across the globe, and British Prime Minister David Cameron, who favored remaining in the European Union, announced he would resign.
It remained uncertain Friday what would be the next step in Britain's departure from European Union, but the process is expected to take up to two years as British and European officials negotiate issues such as trade and immigration rules.
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Lloyd's of London Chairman John Nelson issued an upbeat statement following the vote: “I am confident that Lloyd's will stay at the center of the global specialist insurance and reinsurance sector, and I look forward to continuing our valuable relationship with our European partners,” he said. “For the next two years, our business is unchanged. Lloyd's has a well-prepared contingency plan in place, and Lloyd's will be fully equipped to operate in the new environment.”
But David Matcham, CEO of the International Underwriting Association, which represents London company insurers, acknowledged that the so-called Brexit vote raises concerns for insurers.
“Clearly the U.K.'s decision to exit the E.U. presents challenges for London market companies, and uncertainty surrounding the potentially prolonged nature of this process will be problematic for future planning … The free trade benefits of E.U. membership have been vital in maintaining London's position as a global insurance hub and are highly valued by IUA members. This is true both for insurers headquartered in the U.K. and those international firms that use London as their centre for European business,” Mr. Matcham said in a statement.
“We know that many companies will now be considering their own individual responses. Continued access to European markets is essential and will, I expect, be at the forefront of the process to respond to the referendum decision,” he added.
International insurers and brokers may rethink their strategies as a result of the vote, said Eamonn Flanagan, head of the Liverpool, England office of investment firm Shore Capital Group Ltd.
While London, with Lloyd's as a “global center of excellence”, has been the natural place for international insurers seeking to access E.U. insurance markets to establish operations, it may lose some of its attractions, he said.
“Big players always wanted to be in London … but this might put some grit in the cogs,” Mr. Flanagan said.
In addition, competing insurance centers, such as Dubai, Frankfurt, Singapore and Zurich, will likely try to take advantage of the uncertainty surrounding London's position after the vote, he said.
Marsh & McLennan Cos. Inc. quickly issued a guide to help companies navigate the risk, people and strategic issues raised by the U.K.'s vote to exit the European Union.
The guide said that the effect of the decision will not be fully known until exit negotiations progress, but said “under the more likely scenarios (based on the aspirations declared by pro-Brexit politicians), global non-E.U. multinational companies and E.U.-headquartered firms with sizeable U.K. operations will need to rethink and possibly restructure their U.K. operations, given the likely additional cost and complexity associated with accessing E.U. markets.”
For insurers in particular, Marsh & McLennan said that, following the exit, insurers that want to conduct business in European Union or European Economic Area nations might have to obtain licenses or form new legal entities.
“In advance of full regulatory clarity, some major insurers with U.K. operations may establish a greater presence in continental Europe, in order to operate more easily under a single license,” said the report.
Britain will also need to negotiate its approaches to pan-European regulatory structure, notable Solvency II, “although it seems unlikely that U.K. regulators would want to significantly depart from the scope and aims of the established regimes,” Marsh & McLennan said.
Rating agency Standard & Poor's Corp. said the effect of the decision on the London insurance market would be limited.
“We see the insurance sector as less exposed to the leave vote than the rest of the financial sector,” S&P said in a statement. “While representing about one-third of the U.K.'s very substantial financial services net export surplus, the insurance sector is far more reliant on trade with non-E.U. countries — especially the U.S.”
Oldwick New Jersey-based rating agency A.M. Best & Co. Inc. said it did not expect to take rating actions in the "near term as a direct consequence” of the vote.
“The implications for the financial strength of insurers with regard to subsequent investment market volatility, currency fluctuations and increased economic uncertainty will be closely monitored,” said Best in a statement. “Also, as the terms of the exit are negotiated, A.M. Best will discuss with rated companies what prospective changes will mean for their competitive positions and ability to continue to access business in the U.K. and the E.U.”