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Analysis

Brexit issues and impacts: US insurers

A closer look at what’s next

The decision by voters in the United Kingdom to exit the European Union (EU), known as “Brexit,” was a surprising one. Financial services institutions in the UK and Europe will bear the brunt of this event over both the short and longer term, but what about their counterparts in the US? Read a Closer look from the Deloitte Center for Financial Services to understand the impacts of Brexit for US insurers.

Scroll down for an overview of the critical issues insurers will face or download the full PDF for a detailed, at-a-glance breakdown of the financial, regulatory, operational, and strategic implications for US insurance executives.

The world turned upside down?

The June 23 Brexit vote took place less than a week after the signature global stakeholder seminar of the International Association of Insurance Supervisors (IAIS), which aptly captures both the irony and uncertainty facing US insurers. The detailed impacts and timeline of a post-Brexit world are yet to be seen, however it does raise a great deal of uncertainty and cross-border challenges for insurance companies.

What's next for US insurers?

Insurers face strategic, financial, and operational challenges post-Brexit. Insurance executives should consider the short and long-term impacts and take advantage of the benefits to being an early mover.

Since the fiscal turndown of the last decade, regulatory uncertainty has been a major concern. New regulation has been developed based on a broadening of both operational and geographic scope. Insurers worldwide have been engaged in adapting to proposed changes, based partly on the idea of a global regulatory standard ensuring comparability across regimes.

The impact on US insurers will compound if other countries seek to leave the European Union. To help ensure that exiting is not seen as an attractive option, EU officials negotiating the terms of withdrawal with Britain may seek to impose onerous terms—such as the elimination of passporting, which allows UK companies to easily do business across borders of member countries. That could have a significant impact on US insurers with international operations using the UK as a base for their European organization and require a reexamination of operating models.

Ongoing regulatory negotiations at the IAIS may need to be extended until clarity is achieved. This continuing uncertainty complicates planning efforts, especially for insurers operating in the current EU, but also for all insurers that will be subject to various global standards, including revised insurance core principles (ICPs).

A level regulatory playing field for US insurers in the solvency II market depends on an EU declaration of US regulatory equivalence. That was expected to be facilitated by the current negotiations on a covered agreement between US federal authorities and the EU. A quick resolution may now be more difficult. With that said, what is the path forward? And how long will that path take?

Continue reading about critical implications of Brexit on US CRE, or view the full series to understand the impacts on other key FSI sectors.

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What are three likely implications for US insurers?

There are several considerations for US insurance firms in the post-Brexit era. We briefly examine some of the more significant ones below.

1. Critical implication: Legal and tax
    Area of focus: Operations

What is the likely impact?

  • Legal entity structures may need to be reconsidered. 
  • Insurers previously planning to have the UK regulator oversee all of their EU operations may need to revise business plans, including tax planning. 
  • UK changes toward global tax policies previously agreed upon by the EU, such as BEPS or CBC, should be considered. 
  • Contractual obligation and arrangements with customers and commercial counterparties need to be reevaluated.

2. Critical implication: Legal and tax
    Area of focus: Operations

What is the likely impact?

  • Current policy terms and conditions will have to be reviewed and new policy information prepared and distributed based on UK or EU location. 
  • Supplier costs may rise with possible loss of open EU market. 
  • Insurers may face uncertainty on Solvency II equivalence for the UK. 
  • Systems may need to be reconfigured to reflect the new reality (e.g., assets may need to be differentiated between UK, EU).

3. Critical implication: Governance and operational infrastructure
    Area of focus: Operations

What is the likely impact?

  • Passporting arrangement changes may affect product distribution and regulatory costs. 
  • Probable change in the right to work cross-border in all current EU countries may lead some insurers to relocate or bilocate to properly serve client base. 
  • Bilocation may result in a need for separate boards and governance structures. 
  • Relocation or bilocation could raise tax issues, including employment tax. 
  • New training for staff will need to be provided based on the domicile.

Download the PDF to discover all likely implications for insurance executives to consider.

Brexit: Implications for US financial institutions

Read this series from the Deloitte Center for Financial Services to understand the impacts of Brexit for US banking and capital markets, insurance, and investment management.
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