In the aftermath of the vote by the UK to exit the European Union (EU), insurers and financial institutions will need to begin to identify potential risks and make preparations to track the development of those risks over the next two years, while the exit negotiations take place. Although the mechanics of the exit negotiations and the ultimate outcomes remain unclear, a number of short-term risks have become apparent and longer-term risks are beginning to emerge, which will require preparation and planning on the part of insurers and financial institutions to minimize their impact.

The short term risks include currency depreciation and the impact of the downgrade by key ratings agencies of both the Pound and Euro and high levels of uncertainty. The consequence of these downgrades is likely to be higher borrowing costs for the UK and EU in global financial markets. Funds held in the Pound or Euro will have lost value and transfers of funds in and out of the UK and EU may be disadvantageous. Uncertainties surrounding the status of UK-EU trade in the insurance market and financial services will continue until the exit negotiations are complete.

A number of longer-term risks have emerged, including (1) regulatory uncertainty, (2) access to the European Economic Area (EEA), and (3) people and location issues. We comment below on each:

  1. The FCA and the PRA operate within a regulatory framework which implements EU legislation. Although existing laws passed in the UK to comply with EU Directives (for example Solvency II) will remain in place following the UK’s exit from the EU, EU Regulations are directly applicable to EU firms, so do not have to be implemented by domestic law and will (subject to the exact relationship between the UK and the EU following the split) cease to apply in the UK. The UK may want to continue to follow the regulatory framework set by the EU (e.g. for continuity and in order to maintain its equivalence under Solvency II) but Parliament will not be required to comply with further EU Directives once the UK’s exit from the EU is complete.
  2. Currently, UK insurance firms have direct access to a single insurance market spanning 28 countries and approximately half a billion people. Insurers can conduct cross-border business without requiring further authorisation or incurring additional local costs. Once the UK’s exit from the EU is complete, UK insurance firms may be required to open EU branches in order to be able to underwrite business in their respective territories.
  3. Depending on the terms of the final deal struck, the UK’s exit from the EU may result in reduced free movement of people between the UK and the EU. UK businesses may ultimately lose EU workers, and this, combined with tighter rules on EU immigrations may reduce the talent pool in the UK and limit the numbers of skilled workers.