Aon Risk Solutions
The referendum on EU membership will take place on 23 June, Charles Winter of Aon Risk Solutions explains what a British vote to leave could mean for the captive industry
If the UK leaves the EU, how will it affect the captive insurance industry, particularly captive owners based in the UK?
There are few captives in the UK itself, so the effects are most likely to be felt by UK owners of captives based in Gibraltar or the EU states that have developed captive insurance sectors, such as Ireland and Malta. Captive reinsurance is less likely to be affected. The way insurance is currently written cross-border within the European economic area (EEA) would need to be reviewed.
In the short term, there could be an impact on captives’ asset bases, for example, the valuation of equities and gilts as well as the currency impacts of a change in the relative value of the British pound. Captive boards and managers should consider, along with their investment advisers, whether this is likely to create any stress for captives in relation to solvency or their ability to satisfy non-sterling liabilities.
The effects will also be dependent on the nature of the UK’s future relationship with the EU. A ‘Norway-style’ membership of the EEA may have minimal impact, whereas an exit from the EU and EEA in full has the potential for more fundamental impacts.
In the event of Brexit, will British reinsurance and insurance companies need to be Solvency II compliant? What are the implications if they aren’t?
While Solvency II was born out of EU directives, these have been implemented into national legislation so there should be no need to change the way insurance companies in the UK are regulated.
Given that the regulation doesn’t change, then it would be logical that the UK would achieve Solvency II equivalence.
The UK has been at the forefront of the global insurance industry for decades, centuries even, and it would appear likely that the industry would want to position itself, supported by appropriate regulation, to maintain such a position, including its trade with the EU.
How would Brexit change the way that risks are underwritten?
The main question is, in the absence of passporting rights under the Freedom of Services Directive, whether such companies will still be able to write business into the UK in the same way.
For captives in the UK or Gibraltar, it could call into question the ability to write business from these jurisdictions across the EEA.
For captives that remain in the EEA, the issue is the reverse of this, that is, how to write risks, particularly compulsory classes such as employers’ liability and motor, into the UK. The number of captives writing in this way is, however, relatively low.
The commercial insurance market enjoys the ability to issue a master policy in one EEA state to cover risks across the EEA, without the requirement for separate local policies.
Any changes to this could have a broader effect on the way cover is structured and purchased. The nature of any bilateral agreements put in place post-Brexit will influence the extent of any impact, and the remedies that are appropriate.
What flexibility will the likes of Gibraltar, Jersey and Guernsey have on implementing regulation post-Brexit?
Gibraltar, as an EU member, will be in a different position from Jersey, Guernsey and the Isle of Man, none of which are in the EU or EEA.
The latter jurisdictions have not expressed intentions to date to seek Solvency II equivalence, with the exception of the Isle of Man life insurance sector, so captive regulation is likely to continue to follow the Insurance Core Principles of the International Association of Insurance Supervisors, and the way captives in these jurisdictions relate to the UK or EEA is unlikely to change.
The position for Gibraltar is more complex and is likely to be closely tied to the approach taken by the UK as a whole.
What is your opinion on Brexit? Do you believe it has the potential to damage the industry?
There is a great deal of uncertainty around what a future state post-Brexit would actually look like, and there has been much commentary around the ease or otherwise of reaching agreements of trade and market access. Indeed, there have been views expressed that suggest both positive and negative consequences on an exit from the EU.
It is therefore really too early to give an opinion on the medium to long-term effects on the industry.
With any change, there is likely to be a short-term need to understand the impacts and to plan for these, which is likely to result in a need for increased activity and management focus.
The timeframe for an exit, being a minimum of two years, means that overnight changes are not likely to occur in most areas and that there would be an ability to achieve a planned and orderly transition.
