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Perspectives

Brexit offers opportunity for insurers to reinvent themselves

Highlights from the IIS Global Insurance Forum

While the terms and timing of Brexit implementation remain very much in doubt, an existential game of musical chairs has already been set in motion as insurers start taking concrete and perhaps irreversible steps to prepare for an eventual UK withdrawal from the European Union.

August 9, 2017

A blog post by Sam Friedman, Insurance Research leader, Deloitte Services LP.

Brexit and its potential impact on the industry was top of mind for many of those attending the International Insurance Society (IIS) annual Global Insurance Forum last month, particularly since this year’s event was held in London. That’s ground zero for companies that must transform their operations to remain competitive within the lucrative EU market once the UK’s exit is completed, one way or the other, in less than two years.

The IIS is a natural venue to contemplate the fallout from this cataclysmic political event. The group facilitates research, professional development, and industry-wide collaboration to bolster the role of insurance in meeting societal challenges such as sustainable development. Its annual forum draws an eclectic group of thought leaders from the ranks of carriers, brokers, associations, academia, think tanks, and government. Each segment had its own take on how the industry might adapt to a post-Brexit world, but there were a number of common themes expressed.

Insurers at the forum spoke forcefully about the need to take immediate steps to adapt or risk facing restrictions that will leave them at a competitive disadvantage with EU-based insurers. Many UK carriers have already begun the process of setting up shop in Brussels, Dublin, Frankfort, and Luxembourg, among other locales offering a solid regulatory infrastructure, an established financial services presence, as well as a skilled, multinational workforce.

Brokers at the conference reported that clients have started peppering them with questions about how the London market—which supplies so much of their primary, specialty, and reinsurance coverage for the full gamut of commercial risks—will function as Brexit approaches and is finally executed. There is a lot on the line here, as Lloyd’s alone derived 11 percent of its gross written premiums (totaling about $4.4 billion) from the European market as of the end of 2015.1 Overall, about 16 percent of the London market’s business comes from EU countries besides Great Britain.2

There is additional concern as to how quickly London will hemorrhage talent as the pool is drained by alternative EU domiciles. One report by Lloyd’s and the International Underwriting Association of London said that a “material number” of the 34,000 people working directly in London’s commercial insurance sector, as well as “tens of thousands” employed more indirectly may face a “grave threat” of losing their jobs due to Brexit.3 Even in the short term, an ongoing loss of talent could make it more costly and difficult to continue doing business efficiently in the UK’s financial center well before an actual Brexit takes place.

Brokers and insurers are also worried about the inefficiencies and extra frictional costs that could result during the Brexit transition. Then there’s the potential for a regulatory free-for-all ahead, as competing domiciles jockey to attract UK insurance entities seeking safe harbors.

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Will Brexit be “hard” or “soft?”

The clock is ticking, with the UK government having triggered Article 50 of the Treaty of Lisbon, launching a two-year process that will likely result in a formal separation by March 2019. Some hold out hope for a “soft” Brexit that might preserve a few of the benefits of EU membership for UK insurers, such as “passporting,” which allows carriers to do business easily throughout member countries no matter where they are based.4 But most are bracing for a “hard” Brexit, which would essentially leave UK insurers out in the cold if they don’t establish an adequate base within the European Union.

As I listened to the wide range of concerns about Brexit’s challenges and likely repercussions raised at the IIS meeting, the overall narrative sounded very familiar. All the talk about making dramatic changes to prepare for worst-case scenarios well before the final terms and conditions of Brexit are put in place echoes how the industry responded to the US Department of Labor (DOL) fiduciary rule for those selling retirement products.

In both cases, once the wheels of change were set in motion, the exact details or timing of how the transition would be executed by government officials didn’t matter all that much. What was important was for insurers to move quickly to mitigate any potential competitive disadvantages that might result, and be in a position to capitalize on the advantages of being an early adapter.

With both DOL and Brexit, most insurers realized they couldn’t afford to simply sit back and see how the debate over implementation turned out before adapting to the emerging regulatory environment. In response to the DOL fiduciary rule, many companies changed their products, compensation arrangements, and distribution systems. The same dynamic is at work in the post-Brexit scramble, as UK insurers make substantial investments to open new companies in EU safe havens, move and/or hire people to staff their new facilities, as well as change standard operating procedures and even fundamental business models.

The point is that no matter how the various battles over the particulars of Brexit are resolved, the insurance landscape is already being significantly and perhaps permanently altered. But is that necessarily a bad thing? Disruption is rarely painless or without casualties. Yet the changes being prompted by Brexit might turn out to be an opportunity if those who are being displaced seize the moment to reinvent themselves.

Consider the future of Lloyd’s following Brexit. The 329-year-old insurance marketplace has already taken steps to adapt by setting up a base in Brussels that it plans to have operational in time for January 2019 renewals.5 However, thinking bigger picture, might Brexit be the catalyst to prompt Lloyd’s to relaunch as a more virtual market down the road? How big of a deal is having a physical center in a digital age? Lloyd’s has already long since untethered itself financially from its London base in terms of capital sources, yet in many regards remains physically and psychologically tied to its historic London roots. Perhaps Brexit could change that mindset in a fundamental way.

The same opportunity could present itself to other UK carriers forced by Brexit to find a new base of operation. Typically, when someone moves to a new home, they throw out a lot of stuff that was taking up space in their former abode but ended up being not worth keeping. They often upgrade their furniture and appliances and establish new routines. Setting up shop in locations across Europe could very well inject new blood, improved technology, greater diversity, and renewed energy into an insurer.

With both the US Department of Labor fiduciary rule for those selling retirement products and Brexit, most insurers realized they couldn’t afford to simply sit back and see how the debate over implementation turned out before adapting to the emerging regulatory environment.

Planning for a post-Brexit world

As we dive deeper into the nitty-gritty details of how UK insurers will manage long-term in a reshaped European Union, the European and global insurance markets will likely never be the same regardless of what the political leaders ultimately decide to do. That doesn’t mean it’s going to be worse (or better) for insurers and consumers—just different. Whether the differences are positive or negative is very much within the control of insurers being forced to move now.

As carriers make their post-Brexit plans and get ready to implement them, they should remember that insurance is a fungible resource. Wherever insurers call home, they will need to be more innovative, nimble, flexible, efficient, and responsive to evolving technologies, societal trends, and consumer demands, which know no boundaries.

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Press release, “Lloyd’s to Open EU Insurance Company in Brussels,” March 30, 2017
Carrier Management, “A British EU Exit Could Kill 34,000 London Jobs, IUA Warns,” June 3, 2016
3 Press release, “Brexit poses a grave threat to London insurance jobs and businesses, market leaders declare,” International Underwriting Association of London, June 3, 2016
Andrew N. Mais, “Brexit: What now for US insurers?” Deloitte Center for Financial Services, June 2016
Press release, “Lloyd’s to Open EU Insurance Company in Brussels,” March 30, 2017

QuickLook is a weekly blog from the Deloitte Center for Financial Services about technology, innovation, growth, regulation, and other challenges facing the industry. The views expressed in this blog are those of the blogger and not official statements by Deloitte or any of its affiliates or member firms.

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