Insurers are not known for their reckless risk-taking, but when it comes to Brexit some of them are playing a high stakes game of poker.
Brexit creates particular problems for insurers, especially those who have written long-term contracts — pensions for British citizens in Spain, for example, or commercial liability policies written in London for clients in other parts of the EU.
These contracts were agreed, sometimes decades ago, under EU passporting rules. These allow financial services companies to provide a wide range of services across the single market while only being legally domiciled in one EU country. But insurers say that if and when passporting disappears from the UK, they will be unable to legally pay out on those policies. The Association of British Insurers says that its members face the choice of breaking the contract or breaking the law.
This is not a small matter. Liabilities under these long-term cross-border deals run into billions of pounds.
The ABI is concerned. So is parliament’s influential Treasury select committee, which has asked the government to look into the problem. Regulators are also said to be worried.
Fortunately, there is an answer via the snappily named Part VII transfer. Here the insurer transfers all those troublesome cross-border contracts into a new or existing subsidiary elsewhere in the EU. That done, it can pay out on the policies as normal.
But these transfers are costly, time-consuming and inefficient.
“Advisory, regulatory fees and management costs for the largest Part VII transfers can add up to over £1m, and the cost of communicating to customers about the transfer could be many multiples of that,” says Ashley Prebble, a partner at law firm Clifford Chance. He adds that they can take a year or more to complete.
To add some spice to the mix, there is also the chance that regulators and courts (which have to approve Part VII transfers) could be overwhelmed with demand as Brexit approaches.
“Normally there are about 20 Part VIIs per year but with Brexit — and taking into account that there are 220 UK insurers with outbound EU passports — it could be more than 10 times that number,” says Mr Prebble. “Insurers are worried that there will not be enough capacity to cope with all these applications in time.”
Hence the game of poker. Some insurers are pressing on with a Part VII regardless of what happens in the Brexit talks. They say they want to give their customers confidence that they will be able pay claims even if there is no deal.
But others are delaying a final decision on a transfer until there is clarity on whether the move is necessary. If, as the ABI wants, the Brexit agreement allows insurers to pay out on the policies, they might not need to go through the rigmarole of a Part VII.
But they cannot hang on too long. According to Mr Prebble, they will need to start the process by the end of the year so that everything is in place in the event of a hard Brexit with no deal in 2019.
The two-year transition that Theresa May pointed to in her Florence speech would help, says Mr Prebble:
“Depending on how it is structured, it could enable insurers to delay their plans and then make their decisions once they have visibility of the terms of the free trade agreement. But time is running out on having the clarity needed to enable clear decision making.”
A transition would not solve the problem entirely. The ABI has pointed out that no transition deal is likely to last as long as some of the contracts that will be affected.
All of which leaves the insurers nervously watching the final deal talks, the details of the transition and the clock.
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Brexit talks takeaways
There was better mood music but little progress in Brussels this week, according to Politico. (Politico.eu)
Food for thought
The price and availability of food will be the first, and potentially most acute, impact that food shoppers in the UK will feel after Brexit. Andrew Opie of the British Retail Consortium explains why securing a food trade deal with the EU must be a priority. (UK in a Changing Europe)
Up to 20 top civil servants in the Department for Exiting the EU are set to join Britain’s leading Brexit official in the Cabinet Office, raising fresh questions about the influence of Brexit secretary David Davis. (FT)
The subversion of Brexit
Matthew Parris points out that with two years before departure and another two years’ transition, staying in the EU might seem a good idea. (Spectator)
UK economy in worse shape than thought after data revisions
Chris Giles writes: Broad revisions to Britain’s main statistics on Friday showed the economy has performed worse than previously thought since the Brexit vote, although household finances are significantly stronger.
Year-on-year growth in the second quarter was revised down from 1.7 per cent to 1.5 per cent, the Office for National Statistics said, with slower growth than previously recorded in the last three quarters of 2016.
Alongside new figures showing that output in the all-important services sector dropped 0.2 per cent in July, the figures point towards a weaker-than-expected outlook in the remainder of 2017.
Mark Carney, Bank of England governor, was still talking up the chances of an interest rate rise in coming months before the figures were released, saying: “If the economy continues on the track that it’s been on, and all indications are that it is, in the relatively near term we can expect that interest rates would increase somewhat.”
Most economists still think the BoE will raise interest rates from 0.25 per cent to 0.5 per cent at its meeting in November, but were more cautious following Friday’s data release.
Alan Clarke, of Scotiabank, said: “I’m sticking to my call for a hike in November, but I’m much more nervous now than I was prior to this data release.”
In a further sign of economic uncertainty, figures released by Nationwide on Friday showed that London house prices fell in the third quarter — the first drop recorded by the building society since the financial crisis. Prices across the country as a whole rose 2.25 per cent.
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