The Insurance sector has a high potential exposure to the downside risks of a Brexit. A highly integrated regulatory framework across EU, highly globalised organisations and large balance sheets exposed to market volatility mean that Boards are considering the risks already and investors, analysts and regulators are beginning to focus on where risks may lie.
Our paper on contingency planning for the EU Referendum sets out a framework for thinking through the impact for organisations, recommending the use of specific scenarios to plan for potential consequences without the need to forecast the myriad potential outcomes. This paper supports that, and provides some specific thoughts for the insurance sector, focused on the short term issues that will be considered ahead of the referendum.
Whilst there are many imponderables, to protect investors and organisations there is an urgent task to mitigate the short term risks, and plan for longer term implications to the extent possible.
Economists’ predictions of the impact of a Brexit vary, but most agree the impact will be negative in the short term. Predictions including a reduction in GDP for the UK, a depreciation in the value of Sterling and depressed asset prices, particularly during the period of highest uncertainty immediately after the referendum should there be a ‘leave’ vote, while exit negotiations are underway (minimum 2 years). As such, we anticipate investors and regulators will increasingly be looking for Boards to set out the extent to which they are exposed to these risks. Preparation for these communications is important.
The key questions for insurance executives are:
- What is the story for investors and Boards on the potential long term impacts on your business?; and
- How are you protecting your business from potential short term market volatility which could result from a ‘leave’ vote?
For many insurers, the key short term issues will be to assess the impact of market volatility on balance sheet strength and liquidity, and to provide confidence that adequate consideration has been given to the longer term impacts, should the UK vote to leave the EU. In addition, there may be relatively low cost ‘no regret’ actions which can be included in existing change programmes to mitigate longer term risks.
As such, we recommend Boards convene a cross-organisational working group to consider the impacts, and focus on the short term on three actions:
- Stress test the balance sheet and financial exposure to market volatility;
- War game the medium and longer term impacts; and
- Prepare a communications plan for all key stakeholders.
Key longer term issues:
- Financial – how exposed is your balance sheet to market volatility in asset prices and currency rates – are your capital management, ALM and Treasury functions fit-for-purpose in managing heightened volatility, and how secure is your capital position in the face of a potential degradation of asset prices? Where are your international currency flows, and how would a significant move in the value of Sterling impact your organisation?
- Regulation & Legal – whilst no immediate UK regulatory changes are expected for insurance, would restrictions in passporting arrangements impact on your business – e.g. restricting access to markets or trapping capital? Are there other legal considerations, in areas such as employment or supply chain?
- Talent – how would a reduction in the right of free movement of labour in the EU impact your global workforce?
- Operations – does the business case for in-flight projects stack up in a Brexit scenario? How could current global functions be impacted, particularly where shared service centres are providing services to multiple territories or where long term outsourcing contracts are in play? Could data protection regulation make current operating models more challenging where data would be transferred outside the EU for the first time?
- Customers – is there a potential impact on customer behaviour where global or European organisations would prefer their insurance with an EU entity to guarantee legal protections?
- Strategic – what would be the impact on business plans, including M&A activity, should there be a reduction in the outlook for the UK economy as a result of a Brexit. Would your organisation become vulnerable to take-over with a significantly weakened currency and an eroded balance sheet, or could new acquisition opportunities open up?
- Tax – where restructuring or significant international operations and people moves are considered, what would the tax implications be?
For more information on how to address your short term actions including stress testing, war games and a communications plan, or the long term actions, please get in touch.