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Thoughts on Insurance After Brexit

On the day after the U.K. referendum voted to leave the European Union, a leading U.K. newspaper ran a cartoon with the caption, “Democracy is too important to be left to the people.” Of course, it was tongue in cheek, but the point was well made. Since the vote, markets globally have tumbled, shares in financial institutions have fallen, some as much as a third, the U.K. has “lost” Prime Minster Cameron and some are already seeing this referendum as the first sign of the breakup of the European Union.

In my blog of Feb. 29, “What Happens if U.K. Exists the E.U.?“, I suggested that, for the insurance industry, nothing good would come of the U.K. leaving Europe. I wasn’t alone in that thinking. In the days immediately before the vote, 20 European insurance institutes signed a letter asking that the U.K. not leave. The U.K.-based institute of brokers BIBA urged its members to vote to remain. Surveys of U.K.-based insurance executives showed almost universal agreement to stay.

But everyone was allowed to vote, not just insurance professions. The results showed massive division between different parts of the country, and even directly within families, with the agenda dictated ultimately by three key aspects: the economy; sovereignty and immigration. Some are currently arguing that the third factor, immigration, was the most persuasive and divisive – but in fairness they do a disservice to the complexity of the arguments.

In my lifetime, this event is outstanding in that almost everyone had a point of view, and in many cases were prepared to vocalize it. One madman even exercised his democratic freedom by murdering a member of the U.K. Parliament on the other side of the issue. Overall, it was a dirty campaign that, if anything, has undermined the public’s trust in our public representatives.

The challenge really rested with the bilateral nature of the decision. You were either Remain or Leave. There was no halfway house or room for indecision.

And then the results came in. And chaos was unleashed. The philosopher and statistician Nassim Taleb talks about “black swans” – events of low probability but maximum impact – and many are saying that this is one of them. His 2007 book Black Swans – Coping With the Improbable suggests that many financial services organizations are simply not prepared to cope with losses beyond what they have predicted in their models.

But this isn’t entirely true. One major U.K.-based global insurer has already said that, despite its stock value falling by 25%, it has adequately stress tested its business. I really hope that it represents the wider U.K.-based insurance industry, as opposed to being a one-off. Even so, asset managers are already actively reviewing their portfolios, and there will inevitably be a number of knock-on effects.

What all this means for the man in the street remains uncertain. In a saturated market, suffering from overcapacity, will the “leave” vote affect insurance premiums and, if so, in what way? There is already a threat of increased taxation, and it’s unlikely that the insurance industry will remain unscathed. How the major global insurers based in mainland Europe will respond to the U.K. “issue” will also make interesting viewing.

The fall in value of U.K.-based insurers coupled with the weaker pound sterling will make some U.K. insurers extremely vulnerable to predators, especially those keen to gain a foothold in the Northern hemisphere. Do not be surprised by some M&A activity in the coming months.

At the end of the day, despite all the uncertainty, this is an industry – and a country –that is characterized by resilience. For those working in it, and living in it, we have to be honest and recognize that there are likely to be difficult times ahead. But whatever we think of the vote, the essence of how we choose to live in the U.K. (and the Western world) is in respecting the will of the people. Let’s just get on with it.