Following the UK’s decision to renounce its membership of the EU, insurers must prepare for the after-effects on industry regulation.
The UK insurance industry, like many other sectors, has been uncertain of the implications of Brexit on key measures such as trade, investment, and regulation. While it will be some time before the results of the referendum are truly felt, insurers need to consider and prepare for any possible ramifications.
Potentially the biggest impact on the insurance industry will be on regulation – an issue that has been fervently discussed within the industry for several years in the run-up to the referendum. Currently the EU drives the regulatory environment, with Solvency II being the prime example.
An independent UK insurance market could see the removal of the capital requirement costs for abiding with Solvency II; however, UK insurers are already compliant with much of the regulatory framework, having made significant investments exceeding £200m to this end. It’s therefore difficult to imagine the Prudential Regulation Authority (PRA) significantly deviating from Solvency II; however, insurers must be mindful of the current dilemmatic situation.
The catch-22 is having to abide with a regime over which the UK has little influence. We must not forget that UK regulators were present when the Solvency II regime was designed, and the fact that it was built on regulatory concepts and principles which the UK has fully supported and advocated. Nor should we forget the lengthy implementation process. However, not being part of the EU would hand more discretion to domestic authorities over rule design, which may not have a favorable outcome for UK insurers.
The resultant strategy would be for the UK to pursue a Solvency II-equivalent approach, which may require even more investment and further timely deliberation or implementation processes. But the ultimate risk for the market is not being able to influence regulation from within, with UK insurers still compelled to follow EU regulation in order to remain competitive. The ball is no longer in our court.
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