Brexit

On July 23, 2016, the United Kingdom held a referendum on leaving the European Union that resulted in 52% of the population voting to leave. On January 31, 2020, the United Kingdom (UK) exited the European Union (EU). One reason behind the Brexit vote was a widespread desire to abandon the supremacy of E.U. law. The day after the referendum, David Cameron resigned from his post as Prime Minister of the U.K. The European Union, as the world’s largest market for insurance and reinsurance, provides insurance companies with single market access to the U.K. and 27 member states, reaching over 500 million E.U. consumers. Brexit was also the downfall of Theresa May, Cameron's successor, and is currently an ongoing issue for the current Prime Minister, Rishi Sunak, who succeeded Liz Truss in October 2022.

The vote to leave the E.U. has created an extensive level of uncertainty for insurers in the U.K. and across the global economy. While the UK and the EU agreed on the Trade and Cooperation Agreement (TCA) in December 2020, various aspects of financial services, including insurance, are still being negotiated. The TCA agreement did not provide the UK with the same level of access to the single market as EU membership, leading to a reorganization of operations for many financial firms. As a result, there has been a significant shift of assets and jobs from London to other EU financial hubs like Frankfurt, Paris, and Amsterdam. These changes have had a profound impact on the UK’s financial stability. The pound initially plunged to a thirty-year low after the referendum and has continued to experience significant volatility. While some businesses have adjusted, the long-term effects on the UK’s financial services industry, including insurance, remain uncertain. The sector continues to face challenges related to regulatory divergence, market access, and competition from other global financial centers.

Background

On July 23, 2016, 52% of voters in the United Kingdom opted to leave the European Union, which is colloquially referred to as “Brexit.” The European Union, which involves 27 countries, allows member states free trade policies, and free movement to work, live and travel. Between 2016 and 2020, the date of Brexit was consistently pushed back due disagreement over how the UK should withdraw from the EU.

On March 29, 2017, Prime Minister Theresa May instructed the UK Representative to the EU to deliver the Brexit trigger letter to the President of the European Council. The letter signaled the beginning of Brexit talks and initiated the UK’s “grace period” aiming to help the 3 million EU nationals living in Britain to arrange their affairs and status in the UK. Negotiations dragged on, with UK negotiators repeatedly threatening to leave the EU with no deal in place. The debate shifted from the possibility of staying in the EU and focused around a “soft” vs. “hard” Brexit. A soft Brexit would have allowed the UK to continue to participate in the single market and accept the free movement of people, much like Norway does today. Alternatively, a hard Brexit, which the UK ultimately opted for, saw the UK leave the EU and refuse to compromise on such issues, giving up access to the single market and certain aspects of trade agreements.

During her tenure as Prime Minister, Theresa May proposed three variations of a withdrawal agreement. All of them were voted down by Parliament. After the rejection of her final deal, May announced that she would be stepping down as Prime Minister on June 7, 2019. With this announcement came the candidacies of several prominent British politicians, including Boris Johnson and Jeremy Hunt. On July 24, 2019, Boris Johnson was chosen to lead the Conservative Party and became the new Prime Minister.

Boris Johnson’s election raised the likelihood of a no-deal Brexit scenario. He famously stated he would rather be “dead in a ditch” than delay Brexit again. However, his approach faced resistance from within his own party and Parliament. When 21 Conservative MPs voted against Johnson’s no-deal stance, they were expelled from the party, causing him to lose his majority. Johnson then called for a snap election in December 2019, which resulted in a Conservative majority in Parliament, enabling him to push forward his Brexit agenda. May tried a similar route during her time as Prime Minster, only to lose her majority in a landslide and her ability to pass any deal through Parliament.

As Prime Minster, Johnson suspended Parliament for the longest period since WWII in order to limit opposition to his no-deal Brexit strategy. Despite legal challenges, this move demonstrated Johnson’s determination to deliver Brexit on the original agreed upon date, rather than extending the deadline. The UK formally left the EU on January 31, 2020, marking the beginning of a transition period during which negotiations for the future UK-EU relationship took place. This period ended on December 31, 2020, with the UK fully withdrawing from the EU’s regulatory framework.

The culmination of Brexit negotiations resulted in an agreement known as the Trade and Cooperation Agreement (TCA) between the UK and the EU. The agreement outlines the future relationship in areas such as trade, security, and regulatory alignment. This agreement aimed to mitigate the potential disruptions caused by Brexit, although it did not provide the same level of market access as EU membership. Furthermore, in a bid to strengthen its financial sector post-Brexit, the UK recently struck a “first of its kind” financial services deal with Switzerland in December of 2023. This landmark agreement aims to enhance cooperation and market access between the two countries’ financial services sectors. The deal is expected to facilitate smoother cross-border services, benefiting insurance and reinsurance firms among others, by reducing regulatory barriers and promoting mutual recognition of regulations. While the immediate challenges posed by Brexit have largely been navigated, the long-term effects on the UK’s financial services sector and broader economy remain subjects of ongoing scrutiny and adaptation.

Injuries and Damages

Analysts at the Office for Budget Responsibility estimate that the post-Brexit trading relationship between the UK and the EU, as outlined in the TCA, will reduce long-run productivity in the UK by 4% relative to remaining in the EU. Additionally, a new report published in January 2024 by Cambridge Econometrics shows that London’s economy has shrunk by more than £30billion. The report further calculates that there are nearly two million fewer jobs overall in the UK due to Brexit, with almost 300,000 fewer jobs in the capital alone. Other damages include:

U.K. Access to the Single Market

Since the UK’s withdrawal from the EU, London’s status as a global hub for insurance and reinsurance has faced challenges. Previously, EU membership granted UK-based insurers seamless access to a single market of over 500 million consumers, allowing them to underwrite insurance across all 27 member states on a cross-border basis. However, Brexit has disrupted this arrangement, necessitating new regulatory frameworks, leading to operational adjustments and the relocation of some operations to maintain market access. Additionally, the U.K. may not be able to continue localizing funds in other E.U. jurisdictions to meet liabilities due to future travel restrictions. Further, the U.K. represented one of the most open economic member states in the E.U., so the single market is likely to develop at a slower rate in the future.

Foreign Direct Investment

Historically, the United Kingdom attracted more foreign direct investment (FDI) than any other EU member state. However, post-Brexit, there has been a noticeable decline in FDI inflows. Brexit has led to a shift in FDI strategies, with companies relocating operations from the UK to EU member states to maintain market access. This relocation has boosted intra-EU investments, particularly in financial hubs like Frankfurt, Paris, and Dublin. However, overall FDI into both the UK and the EU has experienced volatility due to increased uncertainty and potential trade barriers. The evolving regulatory landscape and ongoing negotiations continue to influence investment decisions, adding a layer of complexity for businesses operating across these markets.

Trade Agreements

Most international trade agreements are negotiated directly with representatives of the European Union. Traditionally, trade agreements with the EU boost economic activity, stimulate demand for insurance and reinsurance, and create foreign accessibility to the UK reinsurance market. London has historically provided the most successful market to meet reinsurance demands. Since Brexit, the UK has faced challenges in securing new trade deals, leading to economic disruptions and uncertainties. The recent suspension of trade talks with Canada over agricultural disputes and the imposition of tariffs on UK exports like cheese are notable setbacks. Additionally, the loss of access to the EU market has resulted in a significant decrease in UK exports to the EU and increased operational complexities for businesses.

Legislation and Regulation

Since the Queen of England gave formal approval for Brexit on January 9th, 2020, the UK has navigated through a transitional period until December 31, 2020, during which negotiations with the EU shaped future terms. The UK diverged from the 1972 European Communities Act, marking the cessation of its EU membership and ending the precedent of European law over British parliamentary laws. Brexit also terminate the jurisdiction of the European law over British parliamentary laws. Brexit also terminated the jurisdiction of European Court of Justice in the UK. Approximately 80,000 regulations, covering areas from workers’ rights to environmental standards and trade agreements, were affected by this change.

Following Brexit, the UK has undergone significant regulatory adjustments in the insurance and reinsurance sectors. The departure from EU regulations necessitated the creation of new frameworks and adaptations to existing laws, impacting market conduct rules, capital requirements, and consumer protection standards. Insurers have faced challenges in navigating regulatory divergence and ensuring compliance which has led to strategic reviews of their operational models and risk management frameworks.

As of June 2024, the UK has established the Financial Services Regulatory Authority (FSRA) to oversee insurance and financial markets, enhancing regulatory oversight and ensuring alignment with international standards. The UK’s approach post-Brexit includes negotiating bilateral agreements and accession to international regulatory bodies, such as the International Association of Insurance Supervisors (IAIS), to maintain market access and regulatory equivalence. Ongoing adjustments continue to shape the insurance landscape, with insurers focusing on resilience and adaptability in a dynamic regulatory environment shaped by Brexit and global economic shifts.

Liability and Insurance

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Litigation

Since Brexit, litigation dynamics have evolved significantly, impacting how legal disputes involving EU and UK entities are handled. One notable aspect is the continued preference for English courts among EU parties for international litigation. This preference stems from England’s reputation as a global financial center, its robust legal system, which include procedural advantages like the absence of jury trials in civil cases and limited punitive damages, and the cost regime where the losing party typically pays legal costs. These factors have historically made English courts and attractive venue for resolving commercial disputes, despite Brexit introducing new challenges.

However, Brexit has raised several concerns regarding the practicalities of litigation across borders. One major issue is the potential difficulty in serving legal documents to parties located in EU member states for English court proceedings. The withdrawal from EU-wide arrangements on judicial cooperation has necessitated new protocols and agreements to facilitate effective service of process and ensure that legal proceedings are properly initiated and followed. Moreover, questions have arisen about the enforceability of English court judgments in EU member states post-Brexit, as mutual recognition and enforcement mechanisms previously governed by EU regulations may no longer apply.

In response to these challenges, legal professionals and policymakers have been actively seeking solutions to maintain effective cross-border litigation practices. The TCA includes provisions to temporarily maintain aspects of judicial cooperation in civil and commercial matters. However, the agreement only provides a transitional framework, leaving long-term arrangements for mutual recognition of judgments and streamlined cross-border litigation procedures subject to ongoing negotiation and development.

Future Outlook

Brexit has unquestionably left a profound imprint on the UK economy, shaping its trajectory in ways that extend well into the future. The departure from the European Union has not only triggered immediate economic adjustments but also set the stage for longer-term transformations. Recent analyses have demonstrated that Brexit has led to a 2.5% reduction in UK GDP in 2023 relative to a baseline scenario in which it remained in the EU. Experts expect this trend to increase over time, reaching 5 or 6% by 2035, as the increased costs of trading and associated reductions in the terms of trade and productivity persist.

Looking forward, the outlook remains complex and nuanced across various sectors, including insurance and reinsurance. These sectors, deeply integrated within the EU regulatory framework, face challenges stemming from regulatory misalignment and increased operational costs post-Brexit. The need to navigate divergent regulatory landscapes and potentially restricted market access poses ongoing uncertainties. Moreover, as the UK negotiates its position in global trade frameworks, particularly in services where it holds a significant competitive advantage, the insurance industry will be closely scrutinized for its adaptability and resilience in the face of shifting geopolitical and economic dynamics.

Beyond economics, Brexit continues to reverberate through societal and political spheres, influencing debates over national identity, governance, and international relations. The full extent of these impacts will continue to unfold over the coming years, as the UK forges new relationships and recalibrates its global position. As such, while the aforementioned GDP projections are rather bleak, the resilience of UK industries, including insurance and reinsurance, will be crucial in determining how effectively the country navigates this period of transformation.

In the News

2020

• Manufacturers Call For 12-month Warning On EU Safety Standards - August Graham, PM Today (06/16/2020)
  Some of Britain’s biggest transport manufacturers have urged the Government to provide certainty about the UK’s relationship with the European Union after Brexit, and give them a year to prepare for any changes.
• Brexit Brings More Work for Companies to Comply With European Privacy Laws - Catherine Stupp, Wall Street Journal (01/30/2020)
  As the U.K. leaves the European Union on Friday, companies face uncertainties about possible new costs and legal legwork to comply with data protection laws in both Europe and the U.K.
• Brexit Is Finally Happening, but the Complicated Part Is Just Beginning - Peter S. Goodman, The New York Times (01/29/2020)
  As a man who makes whisky for a living, Antony McCallum knows how to wait patiently for the years to pass. He buys spirits from across Scotland, entrusts the liquid to wooden barrels stashed in dark warehouses, and then allows time to perform its alchemy.

2019

• UK Financial System Seen as Resilient to Brexit, Trade Wars - Associated Press, US News (12/16/2019)
  BRITAIN'S financial sector can withstand large shocks and disruptions, whether from a disorderly Brexit or a deterioration in global trade wars, the Bank of England said Monday.
• Boris Johnson: UK is offering Brexit ‘compromise’ to EU - Jill Lawless, AP News (10/02/2019)
  The U.K. offered the European Union a proposed last-minute Brexit deal on Wednesday that it said represents a realistic compromise for both sides, as British Prime Minister Boris Johnson urged the bloc to hold “rapid negotiations towards a solution” after years of wrangling.
• Brexit: All you need to know about the UK leaving the EU - BBC News (09/09/2019)
  The UK is due to leave the European Union (EU) at 23:00 GMT on 31 October 2019. For those not following every twist and turn, this guide covers the basics.
• No-deal Brexit ‘could threaten evidence-sharing with Europe’ on cyber crime - The Belfast Telegraph (05/05/2019)
  European Investigation Orders allow the Police Service of Northern Ireland to access material within 90 days.

2018

• UK's Brexit plan called 'real blow' to City - AFP (Business Standard) (07/12/2018)
  The British government's new blueprint for Brexit today drew a firm thumbs-down from the City, which warned it would damage both the all-important finance sector and the wider economy, but industry appeared happier. . . . The government, partly to avoid the return of a "hard border" between the Republic of Ireland and British-ruled Northern Ireland, has been at pains to map out a future customs plan to govern post-Brexit trade in goods with the European Union. . . . .But its new "white paper" gave little detail about the future of services, which account for 80 percent of the UK economy, including 2.2 million people employed in Britain's world-class financial sector.
• EU Withdrawal Bill officially becomes law - BBC News (06/26/2018)
  The government's flagship Brexit legislation has officially become law, Speaker John Bercow has announced.
• Brexit: Bill approved after May sees off rebellion - BBC News (06/20/2018)
  The government's Brexit bill has passed through Parliament after Theresa May saw off a revolt by Tory MPs.
• Insurers hit shift button despite Brexit grace period - Carolyn Cohn, Huw Jones, REUTERS (05/04/2018)
  Lloyd’s of London, AIG, Allianz and other insurers are ignoring assurances and establishing new hubs in Britain and the European Union before Brexit in March 2019 to ensure access to customers. . . . The moves come despite a “standstill” transition agreement struck between Britain and the European Union in March of this year which is meant to avoid any such hasty relocations. . . . Insurers are being driven by the fact that after Brexit, European firms selling policies in Britain, as well as British and other non-European Union insurers with UK bases selling into Europe, will need to have local regulated entities. . . . Many contacted by Reuters have said they are starting to implement the second phase of their Brexit plans - submitting licence applications, hiring staff and shifting policies.
• David Davis dismisses 'dystopian' Brexit theory as Brussels starts new Project Fear with cancer warning - Gordon Rayner, The Telegraph (02/20/2018)
  Brussels has launched its own version of Project Fear by suggesting British workers will be at a higher risk of cancer as a result of Brexit. . . . A European Commission briefing paper claims the UK could dilute health and safety laws in an attempt to “lower production costs”, which would result in “higher exposure to chemicals and carcinogens”. . . . David Davis, the Brexit Secretary, is irritated by the false claims and on Tuesday rubbished the idea that post-Brexit Britain will be a “dystopian” world akin to the Mad Max films.
• Brexit and GDPR: What to Expect in 2018 - Shearman and Sterling (01/03/2018)
  In a referendum held Thursday, June 23, 2016, the citizens of the United Kingdom (the “UK”) voted to leave the European Union (“EU”) in the so-called “Brexit”. Although the European Union Referendum Act, which authorized holding the referendum, is silent as to further steps, last year the European Union (Notification of Withdrawal) Act 2017 authorized the Prime Minister to notify the EU of the UK’s intent to withdraw. The Prime Minister made this notification on March 29, 2017 under Article 50 of the Treaty on European Union, which provides two years for the parties to negotiate a withdrawal agreement, unless the UK and the European Council unanimously decide to extend this period. Further Acts and proposals in the UK have also sought to give effect to the results of the referendum and prepare for the separation of the UK and EU. . . . One area of concern in the context of Brexit is the UK’s legal framework for privacy and data protection. The UK government has recognized that it will still be part of the EU when the General Data Protection Regulation (the “GDPR”) comes into effect on May 25, 2018. The UK has stated that it will comply with the GDPR, and that its compliance will not be affected by Brexit. To this end, on August 7, 2017, the UK Department of Digital, Culture, Media and Sport (the “DCMS”) published a Statement of Intent, in which it outlined the policy and objectives behind a proposed Data Protection Bill (the “Bill”), which was introduced in Parliament on September 13, 2017 and is currently making its way through both houses.

2017

• Travelers Europe to Create European Subsidiary in Dublin in Response to Brexit - Business Wire (12/19/2017)
  Travelers Europe today announced that it will apply to the Central Bank of Ireland for authorisation of a new, wholly owned insurance subsidiary incorporated in the Republic of Ireland. Based in Dublin, this new subsidiary will enable Travelers to continue to seamlessly serve its customers and broking partners in Ireland and across Europe when the UK exits the European Union, as currently planned in March 2019.
• Travelers Europe to Create European Subsidiary in Dublin in Response to Brexit - Business Wire (12/19/2017)
  Travelers Europe today announced that it will apply to the Central Bank of Ireland for authorisation of a new, wholly owned insurance subsidiary incorporated in the Republic of Ireland. Based in Dublin, this new subsidiary will enable Travelers to continue to seamlessly serve its customers and broking partners in Ireland and across Europe when the UK exits the European Union, as currently planned in March 2019.
• Brexit: UK insurers push for transition deal to preserve London as global hub after EU departure - Carolyn Cohn, Huw Jones, Independent (11/19/2017)
  British and European Union insurers need transitional agreements and a “mutual market access” deal to preserve London’s place as a global hub after Brexit, an insurance lobby group said on Wednesday.
  Britain also needs to negotiate a reinsurance agreement with the United States, one of the sector’s biggest markets, on a similar basis to a recent deal between the United States and the EU, Malcolm Newman, leader of the London Market Group’s Brexit task force, told Reuters.
  The EU’s bilateral trade deal for insurance with Switzerland could be a template for an insurance deal between Britain and the EU as it contains a mechanism for resolving disputes, Newman said. . . . Around 30 insurers, including the Lloyd’s of London specialist insurance market, have already announced plans for an EU subsidiary in the event of a hard Brexit, as they wait for clarity on a Brexit deal.
• Brexit could cost UK ‘up to 75,000 financial jobs’ - Ben Woods , Belfast Telegraph (11/02/2017)
  A Bank of England official has said Britain’s powerhouse financial services sector could shed 10,000 jobs on day one of Brexit and it was “plausible” the losses may reach 75,000. . . . Sam Woods, head of the Bank’s Prudential Regulation Authority (PRA), said the 10,000 figure was based on Brexit contingency plans submitted to the Bank by financial firms, which are assuming no replacement of passporting rights and no transition period beyond the end of March 2019. . . . While he made clear the 75,000 jobs number did not come from the Bank but consultants Oliver Wyman, he said it was a credible prediction of how Britain’s EU divorce may impact the finance sector.

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