The largest insurance and long-term savings industry in Europe is the UK, and the 4th largest in the world.
The sector’s profitability is outstanding, as the industry provides £3.5 billion to the UK economy. However, it looks like Brexit may upset this handsome balance in several ways, more so if the government fails to secure a favourable deal in Brussels.
So, the question is, how would a “no deal” scenario create problems for an industry that pays almost £12 billion in taxes?
‘Passporting’ is the exercise of right for a firm registered in the European Economic Area (EEA), to do business in other EEA states, without further authorisation. It basically allows financial services to discuss business with 28 EU members, as well as Norway, Iceland and Lichtenstein, all without having a base in these countries. Bear in mind that the financial services sector in the UK accounts for around 10% of exports.
If the UK can remain a part of the EEA after Brexit, the right to continue operating as previously done will remain unchanged. However, other outcomes could include a bilateral agreement, as with Switzerland, or no deal on passporting at all.
The costs of relocation in the event of a no passporting agreement could be damaging not just to economic contribution, but jobs as well.
The Association of British Insurers (ABI) mentioned that it would also cause an immediate dilemma with regards to honouring existing policies:
“If nothing is fixed, insurers will be left in an impossible position and face an unacceptable choice: break their promise to customers or risk breaking the law.”
Leaving the European Union without a deal could also mean greater expenses to bringing in foreign car parts, and potentially labour, because EU workers on typically lower wages may choose to return home.
If motor traders plan ahead and prepare, by stocking up on their premises, it could result in a heftier premium, because this stock will need to be included into the sums insured cost. The greater the sums insured, the higher the insurance premium.
Lloyds of London is already strategizing and preparing for a smooth Brexit transition, with plans to open an office in Brussels by the middle of 2018, alongside their base in London. Brussels was the prime choice due its accessibility from London, and the high likelihood of it remaining in the EU.
Lloyds’ Chief Executive Inga Beale has said that some of the 700 people employed in the insurer’s London office, specifically those with European roles, would be required to relocate to Brussels.
The main concern is other insurers deciding to move their offices to Europe, in the event of being denied the right to trade without a physical base. Because according to a report from consultant Cicero, this cut off could put up to 48,000 jobs at risk.
The subsidiary safety net
There are numerous outcomes following the Brexit decision, although it is unclear whether the UK will benefit or not. Therefore, insurers have options to keep steady in the UK while trading in the EU, through subsidiaries to gain access to the EEA.
While this solution may come at a greater expense, the result could create less damage to the insurance market, and consequently the UK economy as a whole. Rather than being shut out altogether.