Will Brexit affect the insurance industry? An Irish study

Abstract

Brexit has thrown up a lot of uncertainties for many industries and sectors. Within financial services and more specifically insurance, many UK-based insurers are considering their options post-Brexit. This viewpoint reviews the positions taken along with examining the effect of Brexit on the UK’s nearest neighbour and where it shares a land border, the Republic of Ireland. Using data from regulators and industry bodies, this review looks at the effect of Brexit upon the UK insurance sector operating in the EU and also reviews the effect of Brexit on the Irish insurance industry.

Keywords

Brexit insurance industry Ireland

Introduction

The dramatic result of the referendum of June 2016, in which the British electorate voted in the majority to call on the UK to leave the European Union in its entirety, caused shockwaves across many sectors. From manufacturing to service industries, the result has led to massive uncertainty, affecting the value of sterling in money markets and the bourses. While the result is unambiguous, there are constitutional issues still to contend with in the UK, its devolved nations of Scotland and Northern Ireland, and its Spanish colony of Gibraltar having voted to remain, and England and Wales to leave. From the EU perspective, the referendum result has caused EU leaders to call upon the UK for a quick divorce from all EU structures and institutions. Under Article 50 of the Lisbon Treaty, a state wishing to leave the EU will also not be subject to the various treaties that the state has signed up to in the past. In other words, there will be a lot of legislative changes afoot for the UK in this EU/UK divorce. As developments are ongoing, currently the signals from the EU to break all ties with the UK, and as quickly as possible. From the UK side, the British prime minister’s speech of 15 January signalled a hard break with the EU, including a withdrawal from the single market (Burke-Kennedy, 2017). This raises massive concern for industry and for the future of the free movement of goods and services, which has been enjoyed by both the UK and other EU member states.

While insurance is not at the forefront of most people’s minds, the UK has a well-developed and sophisticated insurance sector with established markets, companies and regulatory bodies in place to ensure a stable and secure industry. It is structured to function both at home and abroad, both within the EU internal market and worldwide. With the EU call to cease all ties, matters such as the EU internal market will have an impact on the operations of Lloyd’s and the London market to multinational insurers who are home regulated in the UK but passport into other EU states.

This paper will attempt to establish the external effects of Brexit on one EU state, the Republic of Ireland. Ireland and the UK have a shared history and legal system, commercial linkages and insurance products, alongside regulatory frameworks. While Brexit issues are constantly evolving, reviewing circumstances as they stand can illustrate the situation post-Brexit. As part of this review, a qualitative and interpretative approach based on established facts and positions taken by governments, the EU and regulators would be a superlative basis to start from.

Grounded theory method although uniquely suited to fieldwork and qualitative data, can be easily used as a general method of analysis with any form of data collection: survey, experiment, case study. Further, it can combine and integrate them. It transcends specific data collection methods. (Glaser, 1978)

Grounded theory is suited to examining situations that have an interactional element (Goulding, 2005). Grounded theory as a methodology and research approach is well suited to the dynamic of Brexit.

In examining the latest data available, the author will look at two factors: how the Irish insurance industry will be affected by Brexit in terms of UK insurers not being able to operate in the EU (and Ireland); and what effects Brexit will bring to the home-based insurers and to UK-based insurers already serving the Irish market. For the latter part of this paper, in order to keep this study in an organised fashion as an example of the issues discussed, a specific insurance sector was selected on the basis of its popularity, homogeneity as a market across the EU and premium volume: the motor insurance market.

Industry background – Ireland and the UK

Insurance from its beginnings has a strong foundation in Britain and it provides a fascinating laboratory in which to explore ideas drawn from ‘new institutional’ and evolutionary economics (Westall, 1997). It has influenced law-making and commerce and has also formed the development of the agency concept as a means of distribution. While the UK insurance industry serves a home market with some foreign entrants, it also plays an important role abroad for other insurance industries worldwide. The Lloyd’s and London market have provided insurance services across Europe, Asia and the Americas. Within the EU, the Lloyd’s and London market enjoy the ability to passport into other EU and EEA states where they have well-developed markets in providing commercial lines products, and capacity in other sectors, such as personal lines products. Passporting, in essence, allows companies to operate outside their home-regulated nation in other EU states without the need to re-regulate in another market or to set up a base or entity in other markets (Schoenmaker, 2017).

The Irish insurance marketplace, like the economy, is small but open to foreign players. Even before the creation of the EEC/EC/EU concept of the internal market, Ireland has had many foreign insurers providing insurance, including British and continental European insurers. Alongside indigenous insurance companies, many well-known insurance brands operated in Ireland, including Norwich Union, General Accident, London and Sun Alliance. Alongside these, others, such as Cornhill, Royal Insurance and Eagle Star, operated on the basis of working closely with their UK parent companies.

Like the UK, Ireland was affected by the global consolidation of insurers before the implementation of the internal market (Greenford et al., 2007). The result was fewer insurers in the marketplace, while insurers became stronger in terms of diversification and cross-border activity (Cummins and Weiss, 2004). Insurers became more focused on efficiencies and profitability, with many decisions being made at a higher level and often across frontiers (Fenn et al., 2008). In reality, this meant that Ireland saw once-rival insurers come together, resulting in fewer insurers in the marketplace and, therefore, fewer competitive pressures within the marketplace.

Insurance regulation in Ireland changed dramatically in the late 1990s; where it was once performed by a government department, it was then delegated to the reserve bank of the country, resulting in a unified regulator for all financial services for the country (Brophy, 2012). With the creation of the internal market, creating (1) freedom of establishment, (2) freedom of service and (3) single licence – home country control and deregulation of supervision (Swiss Re, 1996) the Central Bank is the recognised Irish regulator for insurance companies headquartered in Ireland that operate throughout the EU.

Operating on similar lines to the UK, distribution channels for motor insurance in Ireland tend to be distributed more via insurance brokers than direct operations, due to market size, the number of insurers offering motor insurance and the preferences of Irish consumers. Compared to the rest of Europe, bancassurance is well established in Ireland. However, the regulators prefer that banks do not become insurers, creating a situation where white-labelled insurance products are provided by insurers but branded by banks as their own (Brophy, 2013; Greenford et al., 2007). With fewer insurers operating in Ireland following the implementation of the internal market, we have seen many other types of insurer enter the marketplace. We have seen some insurers remain in Ireland but operate by passporting into Ireland from another EU country (e.g. Aviva and AIG, which are UK regulated). We have also seen managing general agencies (MGAs) bring in insurers from the Lloyd’s and London market, where MGAs use insurance brokers to distribute products. Since the introduction of the current regulatory structure to Ireland, many MGAs operating here are regulated as intermediaries but source cover (insurance term – paper) from Lloyd’s syndicates, the London market or other insurers elsewhere in Europe.

Ireland: An EU base for UK insurers?

The advent of Brexit has posed many questions for multinational financial service providers that are operating out of the UK and serving EU markets under the single market arrangements. Barclays have chosen Dublin as their post-Brexit EU headquarters (Morris and Callanan, 2017). Insurance organisations such as Lloyd’s have signalled their intention to move their EU operations outside their London base (Irish Times, 2017), a base that has long historical and commercial linkages over 300 years of activity (Halperin, 2017).

While Dublin and Ireland may not be seen as the destination for financial services, its corporate environmental factors have contributed to many insurers choosing to base their operations in Ireland (Greenford et al., 2007). Ireland hosts a significant number of captive insurers (insurers created by large corporations to self-insure) alongside other jurisdictions such as Luxembourg and Malta (Brophy, 2012).

While Ireland may be competing for the post-Brexit financial services’ move from the UK, when compared to other jurisdictions Ireland has many advantages that insurers and corporate entities prefer, as summarised in Table 1 (see above).

Table 1.

Factors for insurers to locate to Ireland.

Factors	Detail
Location	Edge of the European continent, time zone same as the UK
Population	50% of the population is under 35 years of age
Legal system	Common law system similar to UK and USA. EU law is also applicable via Directives and Regulations
EU membership	Joined with the UK and Denmark, full signatory to the majority of treaties and seen as a pro-EU nation
Language	English
Education	Ireland ranks in the 10 countries in the world where the education system meets the needs of a competitive economy. Specific insurance and financial services qualifications are held by many involved in the insurance sector
Taxation	No Irish tax arises on setting up an insurance or reinsurance company in Ireland (subject to certain conditions)
Government incentives	Irish government, through various agencies, attracts a number of large corporations to base their operations in Ireland
Insurers already in Ireland	Many large insurers have EU operations in Ireland: Zurich, DeCare Dental, MetLife, Allianz Worldwide Care, Great-West Lifeco
	Many large insurers have subsidiaries or a presence in Ireland: AXA, Allianz, Aviva, RSA, Royal London, Standard Life, Liberty Mutual, Zurich
	Leading centre for captive market operations

Source: Adapted from Brophy (2014), Central Bank of Ireland (2016) and Insurance Ireland (2017).

British influence in the Irish motor insurance market

Using the latest reported data from the Irish regulator, the Central Bank of Ireland, the insurance statistics for 2015 containing reported results gives an interesting perspective on current British influence in the Irish market. Insurers currently operating in Ireland in the motor insurance market reported an earned premium income of €880,370,000. In analysing the source of this income, 30% of this figure came from insurers that are passporting into the Irish market – insurers that are regulated elsewhere but operating in Ireland under the internal EU market. All the passporting insurers in Ireland are regulated from the UK (see Figure 1).

Figure 1.

Irish motor insurance market – Irish-regulated and passporting insurers. Source: Adapted from Central Bank of Ireland (2016).

The passporting insurers who are currently in Ireland writing motor insurance have all had local regulatory presence before the current EU framework that permits this form of activity (see Figure 2 (insurers are anonymous)).

Figure 2.

Passporting insurers who used to be based in Ireland. Source: Adapted from Central Bank of Ireland (2016).

In looking at the whole motor insurance market again (including locally regulated and passporting insurers), it is clear that the strong historical links between the UK and Ireland are still very robust today, as demonstrated by the following graph (Figure 3).

Figure 3.

Insurers with a UK origin in Ireland (including part-British ownership). Source: Adapted from Central Bank of Ireland (2016).

The Irish insurance market, among that of other EU nations, is well known for having a large number of captive insurers regulated and headquartered (Brophy, 2012). In examining whether there were any captive insurers bearing influence in motor insurance, captive insurers bearing influence in motor insurance represented less than 0.01% of the Irish insurance market.

Discussion

Ireland as a location for UK insurers

Leaving the EU is no easy job. The levels of integration are so high that the departure of a member state will have profound legal, economic and political implications for the divorcee and for the EU (Łazowski, 2012). As outlined by Schoenmaker (2017), part of London’s attractiveness as an international financial centre is the access it affords to the internal market of the EU and the wider European Economic Area. With indications of a hard Brexit taking shape from the EU and the UK authorities, the single market for financial services appears to be closing for UK-regulated entities. Indications from the Central Bank of Ireland state that a growing number of global insurers are considering moving to Ireland following the Brexit vote result (Halpin, 2016). It is clear that insurers currently operating out of the UK are reliant on passporting rights into other European markets (RTÉ, 2016). While indications may not be fact, it is clear that insurers are looking towards Ireland as the destination to relocate post-Brexit. Already some insurers, including Lloyd’s carrier Beazley, have chosen Dublin for numerous reasons, such as the ease of making changes to an already existing presence in Ireland, alongside other factors of language, location, tax and regulatory systems (Irish Times, 2016; RTÉ, 2017). In such a scenario, there will be less specialist insurance jobs available in the UK with regulated operations leaving for other EU nations. An interesting comparison of contingency plans by well-known international insurers illustrates the attractiveness of Ireland as a destination post-Brexit (see Table 2).

Table 2.

Brexit contingency plans of some insurers.

Insurer	Brief synopsis
Aviva	Had a presence here, but closed its Irish-regulated operation to passport into Ireland from the UK; it is reconsidering turning its local Irish office into an Irish subsidiary regulated in Ireland
XL Catlin	Bermuda-domiciled insurer has branches across Europe through the Société Européenne network. Preparing to obtain regulatory approval for EU business for UK operations.
Lloyd’s of London (market)	Plans afoot to move some of its EU business and preparing to be ready as soon as negotiations start on Brexit between the UK and the EU
Lancashire	Considering underwriting some European business from its Bermuda location
Beazley	Application submitted to the Central Bank of Ireland for operating its EU insurance and reinsurance operations from Ireland
Hiscox	Considering setting up EU-based insurance company to weather the possible impact of Brexit
Chesnara	Insurance-focused takeover specialist possibly moving to the Netherlands depending on the regulatory environment after negotiations between UK and EU being concluded
Admiral	Large UK insurer with business in Spain, Italy and France looking to move its European operations to Ireland or another EU location

Source: Adapted from RTÉ (2016).

UK insurers serving Ireland

It is clear that British insurers have significant influence in the Irish insurance market. Coupling this to the fact that in the past two years the motor insurance sector in Ireland has experienced significant price rises means that there are uncertain times ahead. The industry attributes price rises to a number of factors, such as the rising cost of claims, investment performance not returning and new EU solvency regimes (Solvency II) taking effect for all insurers needing to increase reserves (Weston, 2016).

Alongside this, the Irish market has seen a number of insurers disappear or withdraw, for example: Setanta Insurance, regulated in Malta and selling motor insurance in Ireland, went into liquidation during 2014 (McCabe, 2016); Enterprise Insurance Company plc, regulated in Gibraltar and selling motor insurance through an MGA, went into liquidation in 2016 (Brennan and McAleer, 2016); and more recently Zenith Insurance decided to pull out of the Irish motor market through a number of MGAs (Brennan, 2016). This in itself is contributing to a competitive deficit, which means there is a reduced form of pricing pressure with less insurers in the market.

With the current state of the Irish motor market, a Brexit scenario where insurers may pull out of the market would cause further problems for Irish policyholders. While the links between the UK and Ireland go back to well before the formation of the EEC/EC/EU group, trading barriers resulting from a Brexit in financial services could prove detrimental to Ireland in terms of the strong links shown in this study of motor insurance alone. In saying this, Schoenmaker (2017) outlines that many British insurers operating in the EU usually maintain local subsidiaries requiring local market regulation as opposed to using a branch/passport approach similar to the banking sector. However, indications (as outlined above) highlight the dependency that some British-based insurers have on passporting arrangements throughout the EU for their activities.

Returning to the UK, it is clear that there remain more questions than answers to Brexit, especially in a sector that wants to maintain access to a single market: however, since much of this is wrapped up in the freedom of movement question, there is total uncertainty around what could happen (Booth, 2016). Brexit and the UK influence in the Irish insurance market is shown in this snapshot, which illustrates the dependency that some EU states have upon the UK for the provision of insurance and other financial services. This is based on a well-established wholesale insurance market such as Lloyds providing for the insurance needs, not just of the UK but internationally.

Footnotes

Declaration of conflicting interests

The author(s) declared no potential conflicts of interest with respect to the research, authorship, and/or publication of this article.

Funding

The author(s) received no financial support for the research, authorship, and/or publication of this article.

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