The short answer to the above question is unclear. As of this writing (January 2019), the path of the United Kingdom’s exit from the European Union is still subject to change. Prime Minister Theresa May’s draft Brexit plan has been soundly defeated, with no clear alternative under consideration. The Bank of England has warned that post-Brexit, the U.K. economy will be damaged, although how much is also uncertain. It might be worse than the 2008 financial crisis. Or not. The European Commission tasked with managing Brexit asserted that little will change. It is even possible that the U.K. could unilaterally reverse its decision to exit the European Union, and remain a member, although few consider that likely.
The Current Scene
The United Kingdom, especially London, has historically been an insurance hub, especially for management liability coverage. During the U.K.’s time in the European Union, its market grew considerably, thanks, in part, to open trade among members. It is not likely that the entire insurance market will pick up and move to Ireland, as some U.K. businesses have, yet some cross-border reorganizations are certainly in the works.
Currently, the United Kingdom is part of the European Economic Area (EEA), and U.K. insurers have “Freedom of Service” or the ability to “passport” – that is, insure risks across the EEA as if they were licensed in each individual country.
After the U.K. leaves the European Union, it will leave the EEA as well. The current draft does not include any option for the U.K. to re-enter the EEA. Technically, the validity of policies issued by U.K. insurers covering risk throughout the EEA, and conversely, EEA member carriers covering U.K. risk, could be affected. As noted below, carriers are taking steps to minimize the impact.
The bright spot in this situation, from an insured’s point of view, especially in the management liability field, is that carriers have announced plans to ease the transition. Several major carriers, including Chubb and Zurich, have announced contingency plans to continue uninterrupted service for both U.K. and E.U. clients . Lloyds has established a Brussels outpost, with the expectation that business will continue as smoothly as possible. AIG has announced a Section VII transfer of its European business to an E.U. licensed entity, and states that “The Proposed Transfer will have no effect on the cover provided to policyholders, policyholders’ obligations under their policy, or the way that policies are administered.” We have confidence that carriers in general will strive for a smooth transition.
While carriers are working on the technical aspects of Brexit with an eye towards the least disruption of coverage for clients, Gallagher, as a global broker, continues to work with carriers to smooth the transitions. While there may be differences in the manner in which policies are negotiated and placed, Gallagher’s aim is to make the transition as smooth as possible from the client’s point of view. To this end, “the Gallagher group is preparing for the scenario of a ‘hard’ Brexit and no transitional period.”
There are still questions to be answered. Insurance is still regulated on a national basis, with some countries requiring locally admitted carriers. That will not change under Brexit, although it will add a layer of complexity to insurance placements.
Pricing, too, will be in flux. While the risks insured may not have changed materially after Brexit, there will be additional administration and regulatory costs as carriers negotiate the post-Brexit market. Tax expenses will doubtless be an issue. If past trends are indicative, insurers will try to pass some costs to customers directly, rather than absorbing them as an underlying cost. This is challenging in the current environment and is unlikely to improve going forward. Gallagher will strive to maintain stable pricing.
With so much unknown, it would be imprudent to develop many hard and fast rules for dealing with Brexit’s impact on the insurance market. Still, there are a few guidelines that can ease the path for businesses under Brexit.
First, be flexible. Whether the impact of Brexit on world commerce will be moderate, dire, or catastrophic it will almost certainly be global in scope and uneven in intensity. With this in mind, it would be wise to consider all options in insurance purchases. Most carriers are working on plans to minimize disruption for their clients. It is certain that the transition will raise many unforeseen issues. A single global policy may no longer be feasible, although such policies will still be an option in the E.U.
Second, be aware. The United Kingdom, especially England, has always been an insurance hub, especially for management liability coverage. Without a doubt, the London market will need to evaluate its capacity. Further, the insurance industry is highly integrated. A U.S. company may be reinsured in the U.K. or the EU, and that will have an effect on its business globally.
As it stands, the draft Brexit deal contemplates some form of free or favored trade union between the EU and the U.K., with permission for EU nationals to remain in the U.K. without work visas. Yet many EU professionals have already left the U.K. and others may seek a more certain future elsewhere. Some U.K. financial institutions may move their headquarters to other countries, most likely Ireland, which will be the only Englishspeaking EU country after Brexit.
In any case, U.K. companies and those who deal with them will not experience a serene work environment in the short term. Relationships may rupture as key personnel relocate. This will have an impact on pricing and terms.
Third, be prepared. One of the key strengths of the London insurance market has been its nimbleness. With its wealth of expertise and capacity, London could react quickly to unusual risks and shifting business landscapes. That strength may be the most evident casualty of Brexit. The customers who fare best will be those who are prepared.
In simple terms, anyone approaching the London market should provide well-prepared submissions, anticipating questions and be open to shifts among insurers. Waiting until the last minute to submit would be ill-considered. Exploratory meetings with underwriters can be helpful, although, again, things can change significantly once Brexit actually occurs. The prudent customer will also be alert to significant differences in policy terms and risk appetite.
Looking at specifics: Whether a company has an UK or an EU Freedom of Service program, it will be necessary to review how the specific carrier has addressed Brexit. Some carriers, including Chubb and AIG have announced they have already transferred all EU business to EU companies, and all UK business to UK companies, claiming that their insureds coverage will proceed without a hitch. How that assertion translates to specific policy language must be reviewed. Further, issues may arise over the “straddle” period, that is, the time frame during which Brexit is underway.
Despite the somewhat murky future, there is reason to hope. The London market survived the 2008 financial crash and numerous other disasters in its long history. Many U.K. insurers have been preparing for Brexit diligently, and are eager to retain customers and gain new business. While it may be a bumpy road in the near future, we anticipate it will smooth out as business learns to deal with the new reality.
Important Note: This publication of Advisor is not intended to offer legal advice. Any descriptions of coverage provided herein are not intended as an interpretation of coverage. Policy descriptions do not include all the policy terms and conditions contained in an actual policy, and should not be relied on for coverage interpretations. An actual insurance policy must always be consulted for full coverage details.
- See, Judgement of the Court of Justice, in case C-621/18, 10 December 2018, http://curia.europa.eu/juris/document/document_print.jsf;sessionid=1E47B9680885418A86F1B515FFCA9572?docid=208636&text=&dir=&doclang=EN&part=1&occ=first&mode=DOC&pageIndex=0&cid=1094020
- The EEA consists of the European Union members, plus Norway, Iceland and Liechtenstein.
- Zurich has announced its contingency plans for both a planned and a “hard” Brexit. Our General Insurance policies are written by Zurich Insurance Plc. Zurich, like many companies, currently relies on EU “passporting” or “Freedom of Services” to service its UK and EU General Insurance customers. We have submitted an application to the UK Prudential Regulation Authority for a new UK licensing scheme which means we can continue to do business with the least disruption for our customers and distributors and avoids them having to transfer their policies unless absolutely necessary. The UK Government has also provided additional certainty by agreeing a Temporary Permissions Regime (TPR) in the event of No Deal being reached between the EU and UK. The PRA has confirmed that Zurich will be part of that Regime. https://www.zurich.co.uk/en/about-us/media-centre/company-news/2018/impact-of-brexit-on-customer-policies