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Brexit – an increasing risk to Solvency?

My colleague Cat Drummond recently published the findings from our second annual survey of Solvency II implementation across the UK and Ireland, based on the latest Solvency and Financial Condition Reports (SFCRs) of non-life insurers published up to June 2018.

In their SFCRs, companies describe the risks that could impact their future solvency and financial condition, highlighting the more material ones specifically in their reporting.

Nearly 60% of firms mentioned Brexit as a risk in their SFCRs. In particular, 33% of firms saw Brexit as a key risk. This was a significant increase from the 23% of firms highlighting Brexit as a key risk in last year’s SFCRs. This could reflect the perceived lack of progress in Brexit negotiations with the date for leaving the EU just six months away.

Firms see the risks arising from Brexit as:

  • A loss of passporting rights: the inability to underwrite and service business, including paying claims, for mainland European customers.
  • General economic uncertainty and volatility: currency movements and the impact of higher inflation, such as price increases for spare parts for cars imported from Europe.
  • Staffing issues: not only retention of the current workforce but also bandwidth resourcing problems for regulators dealing with authorisation and business transfers. Brexit is also creating hotspots in actuarial salaries in popular EU jurisdictions, eg Dublin.

Over 20% of companies reported in their SFCRs that they were planning to make structural changes, eg setting up a EU27 entity (ie the EU excluding the UK), possibly in conjunction with a court approved business transfer such as a Part VII transfer in the UK. That number is expected to have grown since the SFCRs were published.

However, there are companies that still expect some kind of deal to be done which will address the key passporting issue. Time will tell if this was too optimistic a position in hindsight.

It will be interesting to see how insurers describe the risk from Brexit in their SFCRs next year. They are not due to report until after we have left the EU on 29 March 2019. Or will we still be in the EU?