Brexit and the London insurance market – a quick guide

On June 23, 2016, the United Kingdom (UK) held a referendum on the future of its membership of the European Union (EU). The UK voted by 51.9 per cent to 48.1 per cent to leave the EU after over 40 years of membership. In this article we answer some commonly asked questions in relation to the impact of ‘Brexit’ on the future of the London insurance market.

The London market is currently the largest global centre for insuring commercial and specialty risk. In 2013 this market totalled £60bn of gross written premium. A study conducted by the London Market Group estimates GDP contribution from the London insurance market to be in the region of £12bn (representing about 10 per cent of financial services).¹

As a member of the EU the UK currently benefits from the European single market, using passports available in financial services and other areas to take advantage of free movement principles in the Treaties. Accordingly, once authorised in one EU Member State an insurer or broker can provide services or establish a branch in another Member State without seeking a separate licence. Once the UK leaves the EU these Treaty rights will cease to apply.

What is Article 50 and why does it matter?

Article 50 of the Treaty on European Union provides the mechanism for the exit of a Member State from the Union. That State must serve notice of its intention to leave the EU to the European Council. Once the notice is served, Article 50 provides for a two year period in which to negotiate the terms of withdrawal which must be agreed by qualified majority voting. The Treaties will cease to apply either when the withdrawal agreement takes effect or, in the absence of agreement, after two years following the serving of notice on the Council. The Council in agreement with the leaving Member State may unanimously agree to extend the time period for withdrawal. Importantly, until the Treaties cease to apply, the UK will continue to be a full member of the EU.

Can we estimate the timing of any Brexit?

Until Article 50 is triggered we cannot estimate how long Brexit will take. It is anticipated that even if there is a formal exit after two years, much of the detail of the negotiation will need to be dealt with over a longer period of time.

What are the possible options for a future insurance market?

Subject to the outcome of any negotiations, the UK might adopt a number of models to determine its relationship with the EU and other insurance markets. The least disruptive model would be for the UK to become part of the European Economic Area (EEA) much like Norway, Iceland or Liechtenstein (although UK Prime Minister Theresa May has hinted that her preference is for a bespoke arrangement rather than a pre-existing model). Solvency II and the Insurance Distribution Directive and other EU legislation would still apply in the UK and would enable firms to benefit from the European passport. Politically, however, the continued free movement of people and lack of voting rights on legislation might mean that membership of the EEA will be hard to achieve.

Switzerland has signed a number of bilateral agreements with the EU including the 1989 agreement allowing Swiss non-life insurers access to the EU market (and vice versa). If the UK wished to operate on this model individual bilateral agreements would have to be signed to cover each market or area of collaboration, including insurance.

Five possible post-Brexit trading models

EEA + EFTA	Customs union	Bilateral accords + EFTA	FTA	WTO
The UK could join the European Economic Area (EEA) and the European Free Trade Association (EFTA) and continue to have full access to the single market. It would have to adopt EU regulations and standards. Norway also co-operates with the EU on a broad range of policy areas through the EEA agreement and other bilateral agreements. The EEA was established in 1994 and three EFTA states (Norway, Iceland and Liechtenstein) are currently members.	The UK could enter into a customs union with the EU. Goods could be exported to the EU without tariffs or customs restrictions, but the UK would be required to comply with various areas of EU regulation. Many sectors may be excluded from a customs union and services, including financial services, may not be covered at all. A customs union has been in place between the EU and Turkey since 1995.	The UK could agree a set of bilateral agreements governing access to the single market, sector by sector. It would not get full access to the internal market but would also not be required to comply with EU law except in relation to exports and investments into the EU. The UK could also become a member of EFTA. Switzerland is a member of EFTA and has negotiated a special relationship with the EU through various bilateral accords and trade treaties.	The UK could agree its own free trade agreement with the EU. This could lead to a single comprehensive deal rather than piecemeal agreements. It could potentially involve greater continuity of the single market at the cost of political autonomy. Mexico has a free trade agreement in place with the EU for goods and services. The EU is currently Mexico’s largest export market after the US.	The UK could rely on existing World Trade Organization (WTO) rules and there would then be no negotiations for new agreements between the EU and the UK. The UK would gain full autonomy over its trade policy. However it would no longer have dual representation as both the UK and as a member of the EU. China joined the WTO in 2001 after 15 years of negotiation. China is currently the EU’s biggest trading partner after the US.

What impact would Brexit have on the UK insurance industry?

A substantial amount of insurance and reinsurance is distributed and underwritten both into and out of the UK. The London market currently has access to 500 million customers through the EU (estimated to represent £6bn in premium income).

The Prudential Regulation Authority (PRA) has been heavily involved in the negotiation of Solvency II 5 which was based on the UK’s own ‘risk-based’ regime. At least for the foreseeable future, the approach to the regulation of UK insurers is unlikely to change. Unless EEA status is achieved, the UK must seek recognition of equivalence under Solvency II in order to continue to operate in European markets on anything like a level playing field.

If the UK does not negotiate to maintain access to European markets through membership of the EEA and has not secured a Swiss model bilateral agreement for the insurance sector UK insurers may still be able to cover European risks.

UK insurers could also establish branches, seeking local authorisation, in European countries in which they wish to operate. They would not have the benefit of the passport but could still trade in EU countries to the extent that they met the local reserving, capital and conduct requirements.

Importantly, there is currently no consistent law governing where insurance is underwritten in the EU. Accordingly, London market insurers might insure European risks where local law does not trigger the need for a local licence (known as non-admitted business). The General Agreement on Trading Services which is annexed to the World Trade Organization rules contemplates marine, aviation and transport being written in this fashion, which Article 172 of Solvency II is being interpreted to mean that reinsurance may be written on a non-admitted basis provided the UK attains equivalence.