The Boston Consulting Group (BCG) has come out with guidance for insurers’ Brexit planning.
The BCG thinks insurers “will need to lean heavily on a scenario-based view of the future” when devising strategies.
It follows the UK's June 23 referendum vote on whether or not to continue membership of the European Union, which produced a 52% to 48% win for the side pushing to leave the EU.
Arrangements for how a Brexit might proceed are far from clear, the BCG pointed out, with negotiations almost certainly set to take several years to reach new agreements.
“In the near-term, we can expect a high level of political uncertainty, while the UK economy is likely to see a sustained period of low base rates, lower consumer confidence and house-price stagnation,” said the consultant.
“Depending on the final deal the UK's “passport” rights could be lost, whereby insurers can establish branches and provide services in other EU member states,” the BCG added.
The consultancy, which previously worked with the London Market Group on its London Matters strategy, said Brexit plans needed three elements to mitigate risks in “a suggested strategic process for the coming months”.
These are: the effect of economic volatility on balance sheets; changes to cross-border operating models; and the impact on business models of economic, regulatory and customer dislocations.
The advice was signed off by Pia Tischhauser, BCG’s global practice area leader, and Miguel Ortiz, its senior partner and managing director.
Under economic risks, the BCG lists several factors: reduced asset valuations amid financial volatility; currency impact, particularly for non-UK insurers with UK subsidiaries; credit ratings; extended low interest rates; volatility caused by contagion elsewhere; and risk of defaults in illiquid asset portfolios.
Insurers are assessing the impact of Brexit and making changes to their asset-allocation strategies, the BCG said.
The consultant said this should lead to: detailed modelling of new macro-economic scenarios; e-risking of the balance sheet through hedging and changes in asset strategies; reduction in investment of capital into new projects; and raising new capital to add resilience.
Risks to insurers’ cross-border operating models were also listed by the BCG.
These included: risk of losing passporting rights, compelling the transfer of some activities to within the EU; more onerous EU regulatory requirements; operational complexity; pressure to cut costs; increased cost of doing business in London; a talent shortage in other EU domiciles; reduced customer demand for cross-border products; and, lastly, to consider the “importance of in-country scale for each EU market in any more radical break-up”.
For insurers looking to establish EU new entities that can provide access to Europe for their UK-based operations, the BCG also had a checklist.
Questions to consider for such firms include: the choice of long-term EU domicile; timing of relocation decisions; increased investment in cutting costs; reduced investment in cross-border operating platforms; review of the UK’s role in global operating models; European talent strategies, amid reduced labour mobility; and “further investment into the UK for some activities, given the fall in
On the impact on business models, the impact includes: reduced access to European markets; reduced UK customer demand; increased fraud in property and casualty (P&C) insurance claims; increased pressure on P&C pricing; mergers and acquisitions (M&A) opportunities; and less capacity for innovation.
“In an extreme EU break-up, the need for country-by-country business models”, was also listed by the BCG.
Business-model implications of Brexit should, according to the consultant, consider: a focus in the UK on protecting share in a low-growth environment; opportunistic M&A to drive growth; investment into new geographies, especially where the UK negotiates new trade deals; investment in innovation; and a shift from regional to country strategies.
To move forward the BCG suggested firms needed four short term priorities: develop scenarios for political, regulatory, economic and competitive situations; develop a balanced strategy for short-term resilience and long-term growth; avoid introversion by focusing on the customer and the market; and communicate openly with stakeholders along the way.