Robert Gothan, CEO and founder of Accountagility – a business process management specialist, gives his view on the impact of Brexit for the UK insurance market.
Gothan says insurance firms must now look to implement their ‘Brexit Plan’ or ‘Plan B’ into the core business strategy, which will require more speed, flexibility and complexity than ever before.
Last month, the UK decided to break its ties with the European Union after 43 years. Whilst democracy has spoken, it is unclear what impact this decision will have on the insurance market moving forward.
After all, with Britain still currently a member of the EU, changes may not be felt for years to come.
Working with the international market
The impact of Brexit is likely to be felt far more in the banking sector than in insurance; with that said, insurers must monitor activities over the coming weeks, months and years to turn their ‘Plan B’ into a ‘Plan A’ now that the result has been confirmed.
Until formal negotiations to leave the EU are concluded, the London market will retain access to the EU market for the next two years so, in essence, it is business as usual moving into 2019.
However, once this negotiating period is over, UK insurance firms may be required to open EU branches or link up with European insurers, in order to underwrite business in these territories, resulting in significant resource expenditure.
In addition, British divisions of European firms may decide to relocate to their original member states in order to conduct business more efficiently.
Prior to the referendum, Deutsche Bank was in the process of reviewing whether to move parts of its British division to Germany in the event of a Brexit, and French Banks are being wooed to bring some key London-based operations back to Paris.
What will happen to Solvency II?
The sheer amount of investment in Solvency II from insurers across the UK means that it is unlikely that this directive will disappear overnight.
Despite being seen by many insurance firms as a disadvantage for conducting business outside the insurance industry, UK regulators and insurers were big drivers of this legislation.
In addition, the UK insurance industry will want to retain its access to 28 markets across the EU.
If Solvency II is relaxed for UK firms, it is highly implausible that they will be able to have access to the single market in the future.
The EU drives the regulatory environment, and as such UK firms will need to remain competitive across this landscape. Ironically, this means that UK firms will probably need to create equivalents to certain EU directives, such as Solvency II.
The impact on London
The London insurance market is the largest global hub for commercial and speciality risk, made up of more than 350 companies and employing approximately 48,000 people.
The question to consider is whether access will become restricted to the EU’s talent pool, which would make it much harder for London to remain competitive in the global insurance market.
On the other hand, the City will now be set free to pursue its own destiny without the red tape and regulation coming out of the EU, which will undoubtedly be a positive for the financial services sector as a whole, not just the insurance industry.
A topical example is the UK’s decision to reduce Corporation Tax rates to 15%, the lowest in Europe.
Fintech, too, is likely to thrive. The importance of London as a global Fintech hub will not be eroded in the short-term, and in the medium term, talented individuals will still flock to London due to its prime location for the insurance marketplace.
However, firms will need to consider what will happen to London when formal negotiations begin about the UK’s access to the single market.
It will be important to ensure that the London market remains attractive, not only in terms of recruiting and retaining staff, but also in terms of its specialist expertise in risk.
How can insurers manage the impact to come?
CFOs and finance directors must lead the business in modelling and planning scenarios for the future, whilst keeping their ears to the ground and waiting to see the true impact that Brexit could have on their organisations.
Once the dust settles from the outcome of the referendum and the subsequent political fall-out, insurers must be flexible and prepared when it comes to their planning strategies in order to both anticipate and monitor the impact of change in the industry.
One aspect that has become abundantly clear in the haze following the vote is the importance of having a plan in place as the aftermath of Brexit continues to unfold.
Insurance firms must now look to implement their ‘Brexit Plan’ or ‘Plan B’ into the core business strategy, which will require more speed, flexibility and complexity than ever before.
Advanced and rapid number-crunching will be essential here: organisations will need to incorporate several scenarios into their ever-developing models, whether to plan for currency risk or trade negotiations.
As with any dynamic situation, this kind of planning is crucial. To achieve the best possible outcome, insurance firms in the UK will need to continue to plan for the multi-faceted outcome of a Brexit over the coming weeks, months and years.