The UK is the largest insurance and long-term savings industry in Europe and the 4th largest in the world after it was surpassed by China last year.
There is no doubt to the sector’s profitability as the industry contributes of £3.5bn to the UK economy, but Brexit looks to upset this balance in a number of ways, especially if the UK government is unable to secure a favourable deal in Brussels.
How would a “no deal” scenario cause problems for an industry that pays almost £12bn in taxes?
Passporting allows financial services to do business with 28 EU members, as well as Norway, Iceland and Lichtenstein, without having a base in these countries. The financial services sector in the UK accounts for around 10% of exports.
If the UK is able to remain part of the European Economic Area (EEA) following Brexit, the right to operate in this way will remain unchanged. The other outcomes are a bilateral agreement, as with Switzerland, or no deal on passporting.
The costs of relocation in the event of no passporting agreement could be damaging not just to economic contribution, but jobs as well.
As the Association of British Insurers (ABI) noted, it would also cause an immediate dilemma with regards to honouring existing policies:
“If nothing is fixed, insurers will be left in an impossible position and face an unacceptable choice: break their promise to customers or risk breaking the law.”
Leaving the European Union without a deal could would mean greater expense on bringing in foreign car parts, and potentially labour, as EU workers on typically lower wages may choose to return home.
Even if motor traders are thinking ahead by ensuring stock is on the premises, this could result in a heftier premium as this stock will need to be included into the sums insured cost. The greater the sums insured, the higher the insurance premium.
Lloyds of London is already making preparations for a smooth Brexit transition with plans to open an office in Brussels by the middle of 2018 alongside their base in London. Brussels was the prime choice due to the likelihood it will remain in the EU and its accessibility from London.
Lloyds’ Chief Executive Inga Beale has said that some of the 700 people employed in the insurer’s London office, namely those with European roles, would be required to relocate to Brussels.
The concern is that if other insurers decided to move offices to Europe in the event that they’re not allowed to trade without a physical base, this could put up to 48,000 jobs at risk, according to a report from consultant Cicero.
The subsidiary safety net
Just as there are different routes in the Brexit journey, whether advantageous to the UK or not, so insurers have options to keep their footing in the UK while trading in the EU through subsidiaries in order to gain access to the EEA.
While this may come at a greater expense, the result could be less of a shock to the insurance market, and consequently the UK economy as a whole, then being shut out altogether.