Fitch and think-tank warn UK insurers about no-deal Brexit

Published in: Risk, Risk management, Corporate strategy, Regulation, Pensions, UK, Rest of Europe, Brexit

Companies: Fitch, Centre for European Reform

The consequences of a no-deal Brexit have been starkly spelt out for UK insurers by Fitch Ratings and think-tank, the Centre for European Reform (CER).

Fitch said all insurers it rated have started to put contingency plans in place to honour EU clients’ claims even if there is a no-deal Brexit, when the enforceability of such claims might be questioned.

The ratings agency warned it would deem any underwriter that had not planned properly, and then was “systematically not paying claims to its EU policyholders after Brexit” to be in ‘restricted default’.

The “significant progress” by authorities on interim proposals to protect contract continuity, and planning by insurers themselves, reduced the risks, Fitch said, but “some uncertainty remains”.

Fitch’s warning come after the European Insurance and Occupational Pensions Authority (Eiopa) released findings on 5 November that, 124 undertakings from the UK and Gibraltar with cross-border business in European Economic Area (EEA) have “no or insufficient contingency plans” in place to ensure service continuity in case of hard Brexit.

The authority predicted 9.1m EEA policyholders might face uncertainty and delays in receiving payments in case of a no-deal scenario.

The UK’s Financial Conduct Authority (FCA) responded at the time saying that while the UK government has announced a Temporary Permissions Regime to allow EEA firms to continue servicing contracts with their UK policyholders, no solutions are as of yet available for EEA policyholders of UK firms.

Socio-political thinktank the Centre for European Reform (CER), meanwhile, has predicted that UK exports of insurance and pensions services to the EU will fall by nearly 20% if the UK enters into a free trade agreement (FTA) with the bloc.

In a research paper on Brexit, CER senior research fellow Sam Lowe said FTAs offered “little more than the access afforded under World Trade Organization rules,” which themselves harboured various hurdles to seamless commerce.

Barriers 

New barriers “will inevitably rise”, he said, causing “a significant reduction in cross-border access to the EU services market, even if an FTA is agreed”.

Lowe acknowledged it was much preferable that insurers establish EU presences, and noted many had.

But, using 2015 data from the Office for National Statistics, he still estimated sales of insurance and pensions services under an FTA would fall from £4bn ($5.1bn), to £3.3bn.

The EU’s agreement with Japan illustrated blocks on insurance sales, he said. EU nations “reserved the right to restrict cross-border market access” and committed to liberalise markets “only for a few specific types of direct insurance, largely related to the transportation of goods”.

While the EU might bend “further than ever before” for UK insurers establishing local presences, Lowe said the bloc’s declarations on its wishes for post-Brexit trade had been “relatively vague”.

Furthermore, the EU’s generosity might be restricted by its commitments to other nations – such as by ‘most favoured nation’ clauses for Japan, Canada and South Korea, among others.

“A ‘sweetheart’ services deal for the UK would require the EU fundamentally to change its approach vis-à-vis other third countries,” Lowe said.

The warnings from Fitch and CER follow UK prime minister Theresa May’s decision yesterday to defer a crucial vote on her Brexit deal.

David Walker, Ronan McCaughey