There is an understandable temptation to try to second guess the direction of the Brexit negotiations and to interpret each statement for clues as to what the final outcome might look like. The truth is that we are unlikely to know for certain until very late on in the process.

The autumn of 2017 is expected to see the Brexit negotiations in full flow, especially once the German federal elections are out of the way. It is to be hoped that some of the posturing and political grandstanding will give way to robust consideration of the details of the exit arrangements and lay the foundations for the UK’s future relationship with the European Union.

There will, inevitably, still be lurches into acrimony and fractious political debate, especially as the minority UK Government is forced to inform and consult Parliament more than it would wish. It is quite possible that this could precipitate another general election in the UK before the Brexit negotiations are concluded.

Even if the negotiations yield a proposed agreement, it may still be subject to the approval of member states and a vote in the UK Parliament, creating a further period of uncertainty. Businesses therefore need all those skills of scenario planning we focused on in last year’s Insurance Market Conditions & Trends report to ensure they are not caught out. Those scenarios might be categorised as the managed transition, the big bang and the crash landing.

Realism has to be the starting point

Hoping that Brexit will go away should be filed under wishful thinking, as the Association of British Insurers’ Director General Huw Evans was quick to remind the industry. “The election result will not, in itself, halt Brexit,” he says. “We should remember that both the main parties pledged in their manifestos to leave the Single Market and Customs Union and deliver the referendum mandate. But a minority Conservative Government will clearly have to consult widely to achieve support for its negotiating position and plan for the future. “Insurers are preparing for the worst, while still hoping for an orderly and stable process that creates the basis for a mutually beneficial long-term relationship between the UK and EU27.”

One result of the June 2017 general election in the UK has been to increase the uncertainty of any particular outcome. There are plausible arguments that the new Government’s precarious position increases the prospect of no deal and a hard, cliff-edge Brexit, but it can also be argued that a softer Brexit is more likely as the new Government is forced to seek more consensus in Parliament and the Democratic Unionist Party’s concerns about the Irish border and the province’s agricultural sector come to the fore. The latter would certainly be welcome in the UK insurance industry, as it would make access to other European markets after Brexit more straightforward.

However, if negotiations are delayed by the Government’s need to consult, this will make it even less likely that the complex arrangements that need to be put in place will be achieved by the end of the two-year window. This may make it more likely that an extensive transitional period will need to be implemented, something the industry should be comfortable with and which is certainly preferable to a legal and regulatory vacuum.

Three scenarios

So, how might the three main scenarios play out?

  • The managed transition. This would be an amicable, softer exit deal with broad agreement about future access to the Single Market. How far this could go without the UK accepting free movement of people in return is hard to say. If both sides are still on good terms and talking at the end of the initial Article 50 process in March 2019, it should mean that a wide range of transitional arrangements are put in place, simply because the complexity of the future relationship cannot be intelligently addressed within the constraints of such a tight timetable. These could retain many of the regulatory structures and equivalence rules that underpin access to the Single Market for the insurance industry, at least for a defined period after March 2019.
  • The big bang. A well-managed hard Brexit would not be good for the insurance industry and definitely not its preferred choice, but at least it would offer a degree of clarity to help future planning. Although there would have to be some difficult political concessions, it is also likely that transitional arrangements covering many sectors would need to be put quietly into place. As insurance isn’t an area of serious political controversy between the UK and EU, these should ease the exit for the industry.
  • The crash landing. An acrimonious, inconclusive or fragmented Brexit is the scenario everyone in the industry fears. The prospect that we might reach March 2019 with nothing being agreed and both sides waving accusatory fingers at each other sends shivers through boardrooms. It will be a real challenge to plan for this outcome but it remains a serious possibility. In this scenario, everyone will be left guessing what rules are still in place and how they are to be applied. There will be frantic sector-by-sector discussions between businesses, regulators, consumer groups and politicians about how to create some degree of orderly transition to a destination that itself will be uncertain.

How well prepared is the insurance market?

The rush of announcements in mid-2017 from UK-based insurers looking to establish new bases in the EU shows that many have correctly identified the need to plan for either a big bang or a crash landing. This doesn’t necessarily indicate that insurers think that these are the most likely outcomes, but they have to plan for the worst case in terms of their existing passporting rights. Given that it is expected to take at least 18 months to put these alternative arrangements in place, including a transfer of their existing non-UK EU books, insurers cannot afford just to hope for the best, or even to wait and see.

The insurance industry appears to be as well prepared as it can be, given all of the uncertainties, but we will be watching the negotiations closely over the next 18 months.