How a no-deal Brexit could affect reinsurers?

With Brexit, it’s crunch time.

On Saturday last week, MP’s in the Houses of Commons thrashed it out to vote on the backbench Letwin amendment to withhold final approval for the prime minister, Boris Johnson’s Brexit deal until the relevant legislation has passed. 

The vote saw Johnson suffered a defeat of 322 to 306 for the the amendment, meanwhile an estimated one million people macrched on Parliament Square to demand a second referendum. 

With all this uncertainty and a potential no-deal, there are some clear issues that reinsurers are facing. 

Aon is now looking at pre-emptive solutions that can help mitigate the impact of a potential weather event. 

This was the message of Emma Karhan, head of terrorism specialty and reinsurer relationships London at Aon’s Reinsurance Solutions.

It follows Aon speaking earlier this month at the Tory Party Conference in Manchester, the reinsurer told delegates that the role of insurers in dealing with CAT events was unharnessed.

On the panel, Aon Reinsurance Solutions chairman, Dominic Christian told delegates that collaboration was needed to navigate the influx of natural disasters and extreme weather.

Changing perils

Karhan  told Insurance Times: “The success and relevance of the industry has always been reliant on its ability to respond to changing perils and underlying risks.”

She gave the example of the increased focus on parametric solutions and utilising the ILS market reflects this.

“As the needs of clients have changed the market has responded with appropriate products or solutions. We have a broad spectrum of weather related parametric solutions that respond to temperature changes, and rainfall amounts as an example vs the traditional EQ or Hurricane classifications,” she continued.

Brokers key role

Karhan also stressed that brokers have an extremely important role to play in helping clients in matching the right solution and capital to risk, be these clients’ government, public organisations, the private sector.

“Many of the new solutions that respond to the evolving nature of catastrophe events, originate with brokers responding to the corresponding changing needs of clients,” Karhan added.

Deal or no deal?

For Aon, a “no deal” or “hard” Brexit scenario is particularly concerning as it would mean the UK exiting without a transition period that maintains passporting rights for a certain time.

In a statement from Aon: “This would effectively result in UK-domiciled insurers being unable to offer services into all EEA states on a cross-border basis. The same would be true of EEA [European Economic Area] insurers offering services into the UK on a cross-border basis, were it not for the fact that the UK authorities have put in place a ‘Temporary Permissions Regime’ that creates a window of time for EEA insurers to become re-authorised.”

However, reinsurance is not affected in the same way that insurance will be.

This is due to the cross-border treaty and facultative business being permitted under the WTO [World Trade Organisation] rules that would apply in a hard Brexit.

Why is this?

The statement continued: “In most cases, such business would continue to be written and serviced as it is now. Only in Germany, the Netherlands and Poland are there supplementary rules associated with the concept of ‘equivalency’ under Solvency II that would potentially impact services provided by UK-domiciled reinsurers into those markets. It is worth noting that, even in these territories, legislative changes are underway that, at the very least, should allow legacy business to be serviced from the UK for a specified period.”

“Of course, all of the ‘noise’ around Brexit over an extended period of time has resulted in a great deal of uncertainty. In many cases, UK-domiciled reinsurers have responded by establishing an alternative platform on the continent that will retain passporting rights irrespective of the eventual Brexit outcome.”

The new Lloyd’s subsidiary in Brussels is a notable example.