Brexit Impact on the Insurance Industry

June 23. The Leave vote being marginally higher than the Remain vote means there's a chance of invocation of Article 50 of the Lisbon treaty in the next two years. Although the results of the June 23 vote reflects aspiration of the people of UK but majority of the MPs are still in favor of Remain. Now, this adds to the complexity and results in uncertainty looking into future for all businesses which uses UK as launch pad for their European operations. In this article, we are going to look at how this political event impacts the insurance industry.

Financial Impact:

1. We are going to see a lot of volatility in the exchange rates . Post the Brexit vote, sterling hit a new 31-year low against the dollar. So, the profitability would be impacted.

2. The interest rates would be low as the central banks would be attempting to minimize economic risks.

3. There would be an increased need for more efficient and tighter financial models as far as underwriting and policy pricing is concerned.

4. Weighted average cost of capital (WACC) would rise owing to associated volatility and increased cost of raising capital. This would be reducing the valuation of UK assets.

Impact of Business Strategy and Operating Model

1. There would be a need for re-evaluation of market entry strategy for insurance companies looking for geographic expansion and involved in passporting business into the EU.

2. We shall see a decrease in demand of cross border insurance products amidst the uncertainty of other countries exiting EU post Brexit.

3. As a long term impact, there would be downward pressure on the margins owing limited premium growth and investment returns.

4. Impacted insurance companies may be look for inorganic growth options through M &A and strategic partnerships for venturing into US and APAC markets, if there are not present already.

Impact on regulatory and tax strategy

1. National and central banks may assert more authority over country specific regulations, thereby slowing down the process towards achieving a level playing field.

2. Cost of compliance to regulations would increase owing to the need for having different regulatory systems and technology for compliance to different standards.

3. Contractual obligations and agreements with the customers would requirement amendment.

4. Change in the right to work laws for UK based companies in the European countries may change, which might trigger relocation of offices based on client bases. This would have a natural impact on tax and governance issues.

Llyods which generates 11% of their revenue from EU wouldn't see much of an impact. Though Brexit comes a setback to them but since they have hubs in Dubai, China, Mexico, Singapore and Brazil, they can absorb the shock. Their playbook for distribution in the European part would require a transformation.

Hence, summing up, we can infer Brexit would impact the insurance industry but in the short term - the impact may not be grave. Yes, there would be cost and regulatory pressure on the industry with the need for transforming their business model in EU.