On 23rd June, the British public will vote on an ‘in/out’ EU referendum, which has been dubbed ‘Brexit’ and, in doing so, will decide whether to remain within or withdraw from the European Union. Without assessing the merits of the respective arguments, this article seeks to assess the potential impact a ‘yes’ vote might have for the Irish insurance sector.
If the UK votes to exit – what happens next?
If Britain does vote to leave, the UK would clearly enter a period of considerable uncertainty. As laid out in the Lisbon Treaty, the formal mechanism for leaving the Union is for the Government to give notice to the Council of the EU, which would be effective two years later unless an extension is agreed. The Treaty provides for negotiation of a withdrawal agreement which the UK would have to negotiate with the EU.
This would entail lengthy negotiations as withdrawal would require the unravelling of countless budgetary, legal, political and finance rules. The ultimate economic impact of Brexit upon Ireland will be governed by the nature of that agreement – the greater the degree of access to the EU market negotiated by the UK post-exit would potentially dilute the economic effect that a ‘Brexit’ might otherwise have upon Ireland.
To fully assess the impact a ‘Brexit’ might have, there are a number of pertinent questions: would the UK join the European Economic Area? Or would it look to come to favourable terms with the EU with regards to equivalence for its regulation? Will it look for an agreement on capital rules for banks and insurers to help them to continue to operate in Europe? How would Europe look upon the UK after any potential exit?
Potential Issues for UK Insurers in a Post-Brexit Market
The London market is currently the largest global hub for commercial and specialty risk – controlling more than £60bn of gross written premium. It is a diverse market made of up over 350 firms contributing over 20% of the City’s GDP and employing 48,000. It has the expertise and the capacity to take risk within a regulatory framework and tax environment that has been attractive to the inward flow of capital.
From the London insurance market’s perspective, UK membership of the EU confers three very important benefits:-
- it provides access to the Single Market;
- it encourages Foreign Direct Investment; and
- it facilitates trade with countries outside of the EU.
UK insurers will perhaps be most concerned with the accessibility of the Single Market . In practical terms, this translates to access to a market of over 500 million people. Indeed, the EU is the world’s largest insurance market with a world market share of nearly 33% and total insurance premiums of nearly 1.4 trillion Euros. The London insurance market writes some £6bn of premium income from the EU.
New capital efficiency rules, which make it easier for banks and insurers to access this market, may be a trickier proposition for UK insurers to overcome if the UK decides to leave the EU, irrespective of whatever withdrawal agreement is effected. If the UK was outside of the single market, London would quite simply not be able to service European financial markets as efficiently as if they were to remain in the EU.
If insurance underwriters do not have the freedom to write cross-border business, as they now do, and have to set up local operations across the EU again, there will be competitive disadvantages for those located in London. These fears have been expressed by both the International Underwriting Association (IUA, a UK insurance group) as well as in a report from the Centre for Financial Services Innovation (CFSI).
British-based insurers might otherwise be faced with the prospect of having to secure additional licences to carry on business in the 30 other EEA states which makes the prospect of forming a new insurer based in one of the other EEA states more attractive. An EU insurer will face challenges in the UK also as it may require an additional licence in order to continue to carry on its insurance business in the UK post-exit.
UK reinsurers may also be concerned that EEA states might be able to restrict their ability to cover local risks, for example by denying local cedents credit for reinsurance unless collateral is posted in their favour. UK insurers might also be concerned that an insurance business transfer undertaken might not be binding on their EEA policyholders and may not be able to transfer business to a transferee elsewhere in the EEA.
UK insurers might also be concerned as to any uncertainty as to the enforceability of judgments obtained in the UK in other EEA states and the protection of trade marks or other Intellectual Property in the UK in other EEA states. It is also unclear at this juncture whether the UK would necessarily be considered sufficiently safe for data to be lawfully transferred to it under current EU data protection legislation. Again, much would turn on how any potential exit from the EU would be handled by the UK.
An exit from the EU could also mean that UK companies cease to be able to benefit from tax advantages currently available as a result of the EU’s fundamental freedoms, for example, those provided by the Parent-Subsidiary Directive, the Merger Directive and the Capital Duty Directive. Commentators have also queried how UK judges will interpret UK law derived from EU law in a post-Brexit scenario.
In the event of the UK voting to leave the EU, UK insurers would no doubt look to lobby the Government to retain market access for Lloyd’s and the London Market and create as much regulatory certainty as possible. However, none of the alternatives will be as beneficial for the London market as the current relationship. For the UK to vote in favour of an exit creates very real risks and uncertainties for all UK insurers.
That is not to say that UK insurers cannot adapt – Switzerland and Norway are examples of thriving and financially strong nations who are not members of the EU, both countries have access to the EU market on agreed terms but do not have to comply with all EU laws. Furthermore, two of the largest and most successful insurance companies globally are based in Switzerland, namely Zurich Insurance Group and Swiss Re.
Potential Implications of ‘Brexit’ for the Irish Insurance Sector
The UK, and in particular the City of London, are very significant players in the global financial system and there are currently very close links between financial institutions based in Ireland and the City of London, facilitated by common membership of the EU. Those links would undoubtedly be tested if the UK were to exit the EU and British-based insurers will no doubt be closely monitoring the outcome of the Brexit vote.
It has been speculated in the media that a significant amount of trade currently based in London might relocate if the UK exits . Should this come to pass, the IFSC (the International Financial Services Sector, the cumulative term covering Ireland’s internationally trading financial and insurance services industries) would arguably be well-placed to take advantage of any potential uncertainty in the British insurance sector.
More than 50% of the world’s leading financial services firms already have subsidiaries in Dublin, and it is conceivable that such firms might seek to utilise their Irish bases to minimise any adverse trading implications in the event of a ‘Brexit’ by ensuring that they will retain their ability to efficiently service European financial markets whilst continuing to write consistent volumes of EU business .
The Central Bank has also addressed this point, noting that Irish insurers could face restrictions upon their ability to conduct cross-border insurance business into the UK, cautioning that
“A disorderly ‘Brexit’ could be associated with a loss of access to European markets for UK-based financial services firms”
and agreeing with the analysis that this might lead such firms to expand/relocate/establish operations in Ireland.
Ireland has unique competitive advantages to offer insurers in the event of ‘Brexit’ materialising; it is the only other English-speaking location in the EU, it has a common law system, it is geographically close, and many of those institutions considering a move may already have some form of presence in Ireland. It has also been stated that the centres of Paris and Frankfurt are too inward-looking to properly compete.
The ESRI has considered Brexit:
“Following the loss of the UK’s attractiveness to vertical FDI due to reduced access to the EU market, Ireland may attract additional FDI, possibly in … financial services. However, given large sunk costs, disinvestment in the UK is less likely, particularly in large fixed cost sectors … the UK might consider to further reform its tax system … to make its corporation tax system more competitive”.
Indeed, the ESRI ultimately concludes that, on the basis of patterns of the location choice of new FDI projects in Europe over the past ten years, the expected additional attractiveness of Ireland to new FDI projects should Brexit come to pass is likely to be small. Even outside of the EU, the ESRI believes that the UK’s attractiveness advantages over Ireland would continue to attract FDI to the UK.
Concerns as to Economic Ripples of Brexit for the Irish Insurance Sector
That said, whatever withdrawal agreement is ultimately implemented, it is most likely that Irish trade to the UK will suffer, especially the agri-food industry and the energy market could also be adversely affected. The domestic insurance sector in Ireland often operates as a microcosm of the larger economy and will not be immune from the harm that could be caused to the Irish economy should Britain decide to leave the EU.
The Central Bank has equally expressed caution as to the effect that the larger economic ripples of ‘Brexit’ might have upon the Irish financial sector:
“The impact on the Irish financial sector, including banks, insurance firms and non-bank financial intermediaries, could be significant if it occurred in a disorderly manner and/or had a large negative impact on the UK (United Kingdom) economy”.
Likewise, the prospect of a weakened London insurance market might not ultimately be in Ireland’s long term best interests as Dublin-based insurance firms have tended to benefit from their proximity to the London market. Any downturn in the fortunes of the London insurance market could have a consequential impact in Ireland and the strength of the relationship between Dublin and London might well diminish.
Conclusion: Watch this Space!
UK insurers will be anxiously awaiting the outcome of the ‘Brexit’ vote on 23rd June which will undoubtedly have a significant bearing on their operations and, in turn, upon the Irish insurance sector. If the UK decides to remain in the EU, it will no doubt be on the basis of an agreed platform of reform and both UK and Irish insurers will no doubt be mindful of the regulatory regime of remaining in the EU, i.e. Solvency II, etc.
If the UK decides to leave the EU, there is no question but that Ireland will feel the impact of same, both in terms of potential negative economic (and political) implications although there may be silver linings to that cloud if managed correctly. Given the correlation between the respective sectors, Irish insurers will also surely be closely working with their UK counterparts to prepare for all possibilities in the coming months.