The insurance industry plays an essential part of the UK economy and manages investments equivalent to 25% of the UK’s total net worth.

Right at its doorstep is the world’s largest insurance market: the EU. In the event of a Brexit, the UK insurance industry may therefore be left particularly exposed. This briefing looks at some of the risks and (potential) rewards associated with a “leave” vote.

Market turmoil

When a 1979 referendum produced a "leave" vote, it took Greenland nearly six years to reach agreement with the EU on the single issue of fishing rights; the exit was therefore delayed until 1985.The UK will have much larger issues to resolve. Pending clarity of the UK position, insurers are likely to respond with a withdrawal of investments. We may also see a drop in foreign investment and a possible downgrading of insurers' credit rating, which will have an impact on liquidity and capital positions.

Regulatory implications

Passporting

The EU passporting regime allows UK insurers to write insurance on a cross-border basis without the need for further authorisation or additional local branches. This means that UK firms are not required to deposit additional funds to meet liabilities in other EU jurisdictions, or to report to other EU supervisors. A Brexit will therefore have an adverse impact on insurers that make use of these passporting arrangements. Local law often dictates that a risk can only be underwritten by an EEA authorised insurer or with the benefit of an EU passport.

Regulatory regime

The blanket EU governance regime comes at a price and the UK insurance market may benefit from an improved and flexible national regulatory landscape. There is scope for the UK to set its own level of regulation, “rather than being shackled to an outdated ‘one-size-fits-all’ model”. Lighter regulatory burdens may also increase innovation - a cornerstone of the London market - and provide better access to emerging markets.

Emerging competition

The UK is home to the world’s largest specialist insurance and reinsurance centre, Lloyd’s of London. The 300-year old insurance hub controls £60 billion of gross written premium. At its doorstep is the world’s largest insurance market, which has a 35% share of the global market. The UK offers the best of all words in terms of access to both the London market and the single market. A key part of an emerging market insurer’s diversification strategy is through London and Lloyd’s. This perspective could dramatically change if the UK leaves the EU. As business opportunities in the UK subside, we can expect the emergence of significant competition from other insurance centres around the world.

Conclusion

Looking back to the 1975 referendum, 67% of voters backed the UK’s continued membership with the EU. Recent polls paint a very different picture. A Brexit is a very real possibility, and given the insurance market’s extensive relationship with its European neighbours, the implications are likely to be far reaching.