Last month, on the 31 January, the UK formerly exited the European Union (EU) and now lies in a transition period expected to last until 31 December 2020. While breaking away from the EU has been a long, arduous journey those in the know say this is where the tough talks begin.
It’s hard to say whether there will be any extensions given for this transition period. Some say that this really all depends how things develop. While there is some talk that this could be extended by a further two years, this has already been ruled out by the British government.
Now that our exit from the EU has been cemented the transition enables companies and consumers to prepare for the steep negotiations ahead and the insurance sector is no exception. It’s one of the many industries that will have to make changes and preparations if it wants to remain profitable in a post-Brexit world.
This is by no means a comprehensive list of the changes and challenges the UK insurance sector could face once Brexit negotiations are finalized. But these are certainly some of the main consequences and considerations for the industry:
- Making up our own rules
It’s taken the industry years to become compliant with regulation like Solvency II so many believe there will be no roll back as many rules have already been incorporated into UK law. But with Brexit the UK has the ability to carve out its own path and take on the regulatory bits that make sense and possibly ditch those that it doesn’t agree with.
- Paying higher salaries with restrictions on EU hires
This week new immigration rules have been unveiled by home secretary, Priti Patel. The government will be using a points-based system which will ensure that companies only hire EU employees if they are highly skilled with a minimum salary threshold of £25, 600. The new rules mean that companies have just 10 months to prepare before they are enforced. Besides the impact of freedom of movement, it means hiring people will become more expensive and some believe this could have an impact on the availability of jobs.
- Recognition of professional qualifications
According to Deloitte, there’s a chance that UK-recognized professionals won’t be able to deliver services and advice in the EU. It says that post-Brexit EU-wide mutual recognition of UK qualifications could be replaced by local regulations with varying repercussions. This could, in turn, increase the costs as well as reduce efficiencies.
- Tax implications
Tax is another issue that’s going to have to be ironed out. Mazars points out there’s nothing to do yet as action has yet to be taken by the UK government but there are lots of considerations surrounding direct, indirect and individual tax, to name but a few.
- Passing on the cost
This will be one point that will not sit well with the customer – the fact that brokers and insurers will have to charge more for their services. This possibility was mooted by Tom Bartleet, chief executive of broker Erskine Murray who told Insurance Times that customers should expect ‘significant impact’, highlighting that “someone’s got to pay for our business not being based on freedom of services anymore.”
GoCompare similarly highlighted that uncertainty surrounding Brexit and the weakened pound would also increase the cost of vehicle repair claims because of the increasing cost of imported parts. The comparison site says that this means that car insurance premiums will likely to continue to rise in 2020.
- Absorbing the cost
Not all costs can be taken on by the end customer and there’s no doubt that companies, in particular multinationals will have to absorb some of the impact of this fallout. Last year a report by Ernst & Young found the direct financial impact of Brexit for major financial services firms had already reached nearly £4billion (as of May 2019). Fast forward nearly a year later and that amount is set to be much higher.
Solutions to Brexit
Brexit doesn’t guarantee ‘smooth sailing’, but there are already a number of ways companies are dealing with or preparing for any fall-out. These include the creation of setting up ‘protective cell captives’ in offshore locations like Malta or buying businesses with a presence in Europe.
Lloyd’s of London is a case in point. It’s established a subsidiary insurance and reinsurance company incorporated in Belgium. Lloyd’s Europe is authorized in Belgium by the National Bank of Belgium (NBB) and regulated by the NBB and the Financial Services and Markets Authority in Belgium.
It's not going to be easy. But we believe that with enough preparation, skills and ingenuity the insurance sector can navigate these post-Brexit waters.