QBE, Marsh Consider the Brexit-Effect

QBE Insurance Group announced last month that it will be reviewing its UK-based operations in light of the UK leaving the European Union.

“The referendum outcome may require a revised approach in relation to approximately £500 million [$665.4 million] of insurance and reinsurance premium that QBE currently sources from EU member countries that is written via branches of UK-regulated entities under current EU passporting rules,” said Sydney-based QBE in a statement.

QBE is just one of many re/insurers and other businesses that must determine their options for their UK-based operations after the UK exits the European Union. A report published by Marsh & McLennan Cos. provides an overview of some of the challenges and the possibilities ahead.

Brexit is presenting a particular challenge to London’s position as a global hub, “since it is unclear what will happen to ‘passporting’ rights – the ability of financial services firms based in one EU country to operate in another without setting up a new legal entity,” according to the report titled “The UK Chooses Brexit – Considerations for Companies.”

“[G]lobal non-EU multinational companies and EU-headquartered firms with sizeable UK operations will need to rethink and possibly restructure their UK operations, given the likely additional cost and complexity associated with accessing EU markets,” the report said.

Insurers and brokers that want to continue doing business in the EU may be required to obtain licenses or form a new legal entity based in one of the EU member states, the MMC report added.

That possibility was suggested by QBE in its statement. “Should EU passporting rules not be preserved, QBE will be required to renew this business into newly established licensed EU entities,” QBE said.

Of course, it’s not just re/insurers with UK-based operations that will be affected.

EU-based insurers “may need an additional license to carry on insurance business in the UK, or to form a new UK entity. Writing business through local branches would require local authorization and capital being deposited to support the branch in certain cases,” the report continued.

“In advance of full regulatory clarity, some major insurers with UK operations may establish a greater presence in continental Europe in order to operate more easily under a single license.”

On a positive note, the report said that UK-headquartered firms with global operations and domestic firms “will all face tactical challenges, but will be less affected in the medium term.”

Ample Time for Transition

In its statement, QBE also sought to reassure its customers about what’s ahead. The exit negotiations are expected to take a minimum of two years, QBE said, noting that this period will provide ample time for any needed “administrative transition and to ensure our service commitments to QBE’s European customers are uninterrupted.”

Meanwhile, QBE emphasized, its ability to source business from EU member countries is “unchanged” and the company does not expect any material impact on its “day to day insurance operations as a result of the UK’s decision to leave the EU.”

Reviewing Risk Profile

The MMC report said the prospect of “market volatility and protracted policy and regulatory uncertainty will hold little appeal for many companies at a time of continued economic fragility.”

“Now that we have a decision [on Brexit], companies would be wise to review their risk profile and consider the resilience of their planning assumptions to both likely and unexpected scenarios,” the report went on to say.

Companies need to monitor the Brexit negotiations closely, “factoring the impact of different regulatory and market scenarios into their investment plans.”

During the two-year negotiations to exit the EU – expected to begin when a new Conservative leader is elected – Marsh recommended “strong communication with employees,” which will be critical to maintain “morale, loyalty and productivity.”

“The list of potential actions is long. They will need to be prioritized and sequenced appropriately, as well as reconsidered and adjusted over time,” MMC said, noting that agility in planning is essential.

Looking at the silver lining, the MMC report said: No one ever claimed the EU is perfect, “and UK-based businesses may well find advantages in legislation and regulation that is better attuned to UK needs and possibly faster-moving to address urgent issues.”