LONDON--(BUSINESS WIRE)--A.M. Best does not anticipate taking any rating actions as a direct result of plans for the United Kingdom to exit the European Union (EU), although the cost implications of continuing to access EU business and any resultant downturn in the U.K. economy are likely to weigh on insurers.
In a new Best’s Special Report, titled “Brexit Uncertainties Weigh on U.K. Insurers but Rated Entities Able to Withstand Pressure,” A.M. Best states its opinion that there are three key issues that could impact the U.K. insurance industry in the wake of Brexit – the ability to continue to access EU business following a loss of passporting rights, the economic fall-out and regulatory developments.
As Prime Minister Theresa May’s speech on 17 January 2017 was a broader political statement, there was unsurprisingly no mention of the “passporting” rights, which have significant implications for the financial sector. Catherine Thomas, senior director, analytics, said: “The ability to continue to conduct cross-border business throughout the EU is principally a concern for Lloyd’s, the London market and other commercial insurers. To continue to underwrite EU business, these companies are likely to need to establish an EU-domiciled subsidiary, if they do not already have one. This would have associated costs, operational requirements and resourcing implications.”
The United Kingdom’s vote to leave the EU has resulted in considerable uncertainty regarding the U.K.’s economy, which could have a negative impact on domestic insurers’ premium volumes. There are concerns that an economic downturn could impact capital adequacy if widespread corporate downgrades affect the credit quality of U.K. insurers’ investment portfolios. However, A.M. Best does not expect there to be a deterioration in the quality of investment portfolios in the near term.
As a consequence of the U.K.'s exit from the Single Market, insurers domiciled in the United Kingdom would no longer be directly subject to Solvency II regulation. Yvette Essen, director, research & communications – Europe & emerging markets, said: “Equivalence is likely to be granted. The Prudential Regulation Authority has established itself as a strong regulator, and has been strict with its application of Solvency II. Without equivalence, reinsurers may have to post collateral to support EU-sourced business.”
Catherine Thomas added: “A.M. Best does not expect to take rating actions as a direct consequence of Brexit. However, increased economic and regulatory uncertainty, as well as the potential for higher barriers to trade, overall, is a credit negative for the U.K. insurance industry. As the terms of the exit are negotiated, A.M. Best will continue to discuss with rated companies what prospective changes will mean for their competitive positions and ability to continue to access business in the United Kingdom and the EU. Any impact on revenue or profitability will be taken into account in our assessment of a company’s profile and operating performance.”
To access a complimentary copy of this special report, please visit http://www3.ambest.com/bestweek/purchase.asp?record_code=257869.
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