One door closes, another opens: Gearing up your business for Brexit

As globalisation goes into retreat, once open and stable trading arrangements are giving way to a much more complex web of bi-lateral ties. 

Access to certain markets is becoming more difficult as a result – 60% of insurance CEOs believe that it’s becoming harder to balance competing in an open global marketplace with trends toward more protectionist national policies. This is leading many insurers to rethink where they operate and how their businesses are structured.

As with any form of disruption, there are also opportunities. Governments are competing with each other to attract insurers looking to relocate or set up new subsidiaries. And as new market barriers make some operations unviable, a lot of business is going to be coming up for grabs and openings for M&A will increase. 

The UK’s planned withdrawal from the EU exemplifies the challenges and opportunities – looser ties between the UK and EU on the one side and new free trade agreements (FTAs) between the UK and other markets around the world on the other. In a recently published PwC report, Uncharted waters: Tackling reinsurers’ riskiest exposures, we set out a framework for assessing the impact of Brexit and how to prepare for the changes ahead. 

What’s at stake?

The key issue at stake is the future of the ‘passporting’ rights through which EU (re)insurance firms can currently do business in each other’s markets without the need for in-country subsidiaries. The outcome would not only affect UK and Continental EU (re)insurers and intermediaries, but also businesses from around the world coming to London to access global and specialist risks.

The UK (re)insurance ecosystem comprises a melee of UK and EU (re)insurers and intermediaries, accessing each other’s markets via passporting. If free trade arrangements that afford (re)insurance businesses similar market access between the UK and EU member states cannot be agreed, it may be necessary to set up new subsidiaries or repurpose existing entities. The UK could also eventually seek ‘equivalence’ for (re)insurers under Solvency II just as Switzerland and Bermuda have done. Of itself, however, equivalence will not achieve passport style access and a broader form of ‘mutual recognition’ will be required – perhaps extending some of the concepts included within the US Covered Agreement. The EU Insurance Distribution Directive, which applies to both (re)insurers and intermediaries, also does not provide for equivalence. 

If your business benefits from passporting and equivalence, it’s therefore important to look closely at the terms of these agreements and any standalone FTAs and memorandums of understanding that might come into play. 

Gauging the impact – the 5Cs

While solutions such as creating new subsidiaries could overcome market barriers, this has to be weighed up against a series of feasibility and cost-benefit considerations. It’s also important to recognise that Brexit is an enterprise-wide issue, with deep implications for areas such as distribution, governance, tax, talent, reporting and where you book risks:

Cost 

Creating additional subsidiaries would inevitably lead to higher capital and compliance costs. The efficiency of reinsurance arrangements could also be affected, depending on the outcome on equivalence.

Capacity and choice 

Additional costs and entry barriers could make some business operations unviable, spurring divestment and further consolidation within the market.

Complexity

Setting up new subsidiaries will heighten the complexities of governance, operating models and reporting – and for (re)insurers that are part of groups, their group supervision arrangements, with many having only just consolidated subsidiary entities into branch structures to optimise under Solvency II. 

Contract certainty 

While a lot of the focus has centred on how to access new business in the absence of passporting, there’s also uncertainty over how UK and EU (re)insurers and intermediaries would fulfil existing obligations to customers and clients given the timeframes to reorganise. This includes the legal basis for settling claims where new entities and permissions are required – it also affects business discontinuing due to Brexit and existing run off business. 

Competition

The structural changes resulting from Brexit have potential implications for the broader competitive landscape, both within the EU and beyond, with the UK seeking bilateral ties with non-EU jurisdictions. 

Planning ahead

So how can your business prepare? While the outcome of the negotiations is still uncertain, with the clock ticking it’s essential to actively plan and establish contingencies. This includes gauging the impact of the different Brexit scenarios on your ability to serve priority markets and determining your options for sustaining access. Many UK firms have already assessed potential new structures and domiciles against key criteria such as talent availability, tax treaties, supervisory style, infrastructure and language. EU (re)insurers passporting into the UK have to consider the possibility of setting up a third country branch or a subsidiary. The key for all firms as they execute plans is to establish clear implementation timelines and decision-making highlighting the key ‘points of no return’ and contingencies to respond to Brexit uncertainties. 

Cutting across all these considerations is the importance of looking at Brexit in the round. How would the different scenarios affect your plans for modernising systems, structures and operations, for example? How will Brexit impinge on upcoming regulatory changes (e.g. IFRS 17, the Insurance Distribution Directive or General Data Protection Regulation)? 

Competitive catalyst

An increasingly protectionist market landscape is putting some business at risk. Yet it could also create new openings. Coming through stronger demands an eye for the opportunities as well as the threats. It also requires a clear sense of how your response fits into wider plans for competing in an increasingly disrupted market environment.

?? 2017 PwC. All rights reserved. PwC refers to the PwC network and/or one or more of its member firms, each of which is a separate legal entity. Please see www.pwc.com/structure for further details. This content is for general information purposes only, and should not be used as a substitute for consultation with professional advisors.