For the large majority of UK insurers operational risks following the Brexit vote are expected to be manageable, and the credit impact will likely be moderate, according to Moody’s Investors Service.
Exactly how much of an impact the UK’s vote leave the EU will have on the London market and broader UK insurance industry remains uncertain, with issues such as passporting rights, single market access, and Solvency II regulation remaining unclear.
In response to the Brexit vote Moody’s has commented on the potential impact to UK issuers, which includes insurers and reinsurers, providing some insight into the challenges the sector could be faced with in the months ahead.
“The loss of “passporting” arrangements would be manageable for the sector, as most UK companies operate in continental Europe through subsidiaries and vice versa. We also do not expect material changes to UK insurance laws upon EU exit given prospects for the UK to gain Solvency II equivalence,” said Moody’s.
However, for those insurers that service multinational commercial clients with no local subsidiary, Moody’s warns that a comprehensive loss of passporting rights, absent an adequate substitute being in place, “would be costly and disruptive.”
In response to the UK’s Brexit vote a number of insurers and reinsurers have signalled setting up subsidiaries in a remaining EU member country, with the specialist Lloyd’s of London re/insurance marketplace recently announcing Brussels, Belgium as a new EU base.
While Moody’s describes the potential operational risks as manageable, the credit implications for UK insurers is predicted to be moderate.
“Weaker economic growth and prolonged financial market volatility remain key risks for the UK insurance sector. However, given the resilient macroeconomic environment and recovery of financial markets since the referendum, we view the impact on insurers’ earnings and capitalisation as moderate going forward,” said Moody’s.
Moody’s highlights resilient revenue and earnings growth for the UK life insurance sector in 2016 and, maintaining its stable outlook for the UK property and casualty (P&C) sector, reflects the belief that in the case of a modest economic slowdown, which Moody’s assumes in its base case scenario, Moody’s doesn’t “expect a substantial fall in the demand for P&C insurance products, particularly in mandatory lines such as motor insurance and employers liability.”
The depreciation of the British Pound has been another concern cited by numerous financial services sectors with regards to Brexit, but Moody’s feels that the impact on UK insurers’ balance sheets will be minimal owing to their “good matching between sterling-denominated assets and liabilities.”
With regards to regulation and Solvency II, Moody’s expects the UK to at least gain initial Solvency II equivalence, but does warn that the long-term implications of divergent regulatory landscapes between the UK and other EU countries has increased as a result of Brexit.
“As and when the regulatory regimes start to diverge, this could reduce capital fungibility and increase the regulatory burden for insurers with subsidiaries in both jurisdictions, as a result of dual oversight,” said Moody’s.
