Insurers want transitional deal to avoid worst Brexit risks

The UK has yet to set out its Brexit strategy, leaving business and insurers in the dark about future access to the EU single market and any future regulatory landscape. However, the political debate appears to be narrowing. Since the vote to leave in June, battle lines have been drawn between those that want a clean break with the EU - a so-called hard Brexit - and those that favour continued access to the single market or customs union - a so-called soft Brexit. According to David Lea, senior Europe analyst at Control Risks, the most likely outcome is a hard Brexit. He believes the compromises needed to secure access to EU markets will be unpalatable to some of those in the UK who voted to leave the EU.hideHowever, a hard Brexit would bring "real risk challenges" to business and regulation, he added. A UK House of Lords Committee report published this week warned that a hard Brexit, with the UK falling back on World Trade Organisation rules, would have a dramatic effect on trade, resulting in significant tariffs for goods and increased restrictions on services. Mr Lea also noted that two years is a short timeframe for Brexit negotiations and for companies to prepare to leave the EU. There is also the risk of unforeseen consequences on regulations and trade, legal uncertainties and potential mishandling of negotiations, according to Mr Lea. Dr Florian Otto, head of Europe at political risk consultant Verisk Maplecroft, said the absence of a clear UK government Brexit plan creates problems for business. "The key problem stemming from uncertainty around Brexit is that the current legal framework in which trade takes place, and on which basis supply chains have been organised, is in question," according to Dr Otto. "The government has not agreed on and published its objectives, which would allow business to infer how the desired new relationship with the EU would impact them directly. As a result, companies have to make contingency plans for a broad range of scenarios and outcomes, which translates into extra costs and holds up investment," he said. Brexit is also creating regulatory uncertainty, said Dr Otto. "Depending on what form Brexit ultimately takes, it could result in the most far-reaching regulatory change companies in the UK have experienced ever," he said. "European law and regulations have become woven into the regulatory fabric of the UK, which means that disentangling it will be extremely complicated and take a very long time - with uncertain outcomes," he added. Concern over trading rights and regulation has led to growing calls for a transition period post Brexit. Under this scenario the UK could leave the EU as early as 2018 but continue to access the single market for a defined period as it thrashes out regulation and trading arrangements. Business groups, including the Association of British Insurers (ABI), have been calling for a smooth transition to Brexit, rather than a "cliff edge". This is a view said to be shared by the Bank of England Governor Mark Carney. Huw Evans, director general of the ABI, said that the UK government should "make a clear commitment that it will seek an early agreement with our European partners on a high level transitional implementation period". He warned that without this commitment insurers most affected by Brexit could be forced to leave the UK before a final deal is clear. AIG has already indicated that it may move its European headquarters to France, while Lloyd's is looking at the possibly of setting up an EU underwriting subsidiary, or branches, in Europe. Heightened calls for a transition deal followed reports that leaders of the UK's largest insurers, including Lloyd's of London, were told by senior government ministers that insurers would not get preferential treatment after Brexit. This suggests UK insurers are likely to lose passporting rights that give them access to the single market. At the end of November, UK Prime Minister Theresa May hinted that a transitional Brexit deal might be possible to avoid problems for business. UK Chancellor Philip Hammond also backed a transitional deal, noting that business would need longer than two years to adjust to Brexit. The House of Lords EU Committee report published on Tuesday said that a free trade agreement with the EU would take longer than two years to negotiate. Therefore the government will need to agree a transitional trade arrangement between the UK leaving the EU and full implementation of new trade terms, it concluded. However, there remains significant opposition to a transitional agreement. Many in favour of a clean break with Europe see transitional arrangements as a ruse to derail Brexit. The EU's chief Brexit negotiator, Michel Barnier, is also reportedly not in favour of a transitional deal that would give the UK access to the single market under favourable terms.

Insurers want transitional deal to avoid worst Brexit risks

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