June 27, 2016 by Sara Tatelman
The numbers are in and the UK is out. A very small majority (51.2 per cent) of Britons voted to leave the European Union in yesterday’s Brexit vote, a decision certain to affect the insurance industry.
“There are likely to be a number of medium-term changes,” Steven Mendel, CEO of peer-to-peer insurer Bought By Many in London, told Top Broker.
To begin with, premiums are likely to shoot up because “the last thing that any financial services company wants is uncertainty and there’s lots of that right now,” Mendel says. After news of the Leave victory, for example, the pound plunged to a 30-year low. So to make up for the lack of currency certainty, premiums will climb.
“…The vote brings with it some short-term uncertainty, and for this reason investors are assuming higher risk premiums and hence lower prices,” Andreas Gruber, chief investment officer at Allianz, said in a release. Nevertheless, “we believe market disruptions are short-term.”
Mendel also points out some of the lower-cost insurers who do business in the UK are not domiciled there. After the UK leaves the EU, they will have to be, and the move may cause their pricing to permanently increase.
As for UK insurers—such as Bought By Many—that work in other parts of the EU, Mendel anticipates they will have to get regulatory permission from every other country in which they do business, which cane be both a lengthy and expensive process.
“The Lloyd’s & London Market and General Insurance Market make extensive use of passporting,” Jonathan Howe, UK insurance leader at PwC in London, said in a release. “The loss of these rights could see insurers being forced to restructure and facing large operational, regulatory and tax costs as they adapt to such a change.”
Mendel doesn’t expect European insurers to withdraw from the UK just because of Brexit. The UK is, after all, Europe’s second largest insurance market, but it is highly competitive, especially for home and auto coverage. “But I think if the business is already looking a bit uncertain, this may be a good justification for it.”
German insurer Allianz, for their part, remains “committed to the UK market.”
Furthermore, London may lose its prominence as a global financial hub. “Many non UK insurance companies from areas such as the USA and Asia currently use the UK as their European headquarters and as a ‘gateway’ into Europe through EU/EEA passporting,” Howe said. “There is a real risk that these rights could be eliminated and insurers will be thinking about the best location for their bases in the future.”
Michael Menhart, chief economist at Munich Re, agreed. While Brexit will affect insurance less than other industries, “London will lose influence as a financial centre to hubs such as Singapore or New York,” he said in a statement, “and this will also affect insurers.”
This story was originally published by Canadian Insurance Top Broker.