All set for Brexit and a journey into the unknown
By David Worsfold, Worsfold Media Services Ltd

The sweeping victory for Boris Johnson’s Conservatives in the UK’s General Election last month has moved the fractious, divisive and seemingly endless debate about Brexit into a new phase. The UK’s formal departure from the European Union at the end of January is now certain. However, that is only the end of the beginning as the UK and the EU are now embarking on a journey into the unknown.

They will be hurled into 11 months of frantic negotiations to hammer out a trade deal by the end of 2020. Many experts do not believe it will be possible to achieve much in that ludicrously tight timescale. Senior European Union officials almost instantly started talking about extending the transition period for up to another two years. Prime Minister Johnson’s response was to enshrine that final departure date into law, leaving almost no room for manoeuvre.

There will be plenty of posturing, proposals and counter-proposals over the next few months. The likely outcome is a very broad heads of agreement type deal will be signed off in time as neither the EU nor the UK will want to admit failure and will be keen to avoid a finger-pointing blame game. This very basic agreement is unlikely to have much substance and will leave more questions unanswered than it will ever come near to answering. This means the UK could still be facing a pretty hard Brexit at the end of the year. This could be very disruptive for the insurance industry.

It will impact insurance in many ways, not least because it will be likely that most trade with the EU will have to be conducted on World Trade Organisation terms from the end of this year while more detailed sector-by-sector deals are slowly put in place. This will also be the case for the trade deals with the 50+ countries and trading blocs that the UK currently has settled trading arrangements with by virtue of its membership of the EU. This will impact the UK’s trading relationship with the USA, something the UK government has given a high priority to settling quickly.

WTO terms have yawning gaps when it comes to financial services so without some softening in the form of a transitional period of mutual recognition between the EU and UK the next phase of the Brexit journey could be a very bumpy, uncertain ride.

Transitional arrangements for the insurance sector could be hard to achieve as few national regulators in Europe have offered anything meaningful so far. This is definitely not helped by the UK insurance market being divided on what sort of future relationship it wants with the EU.

The Association of British Insurers talks about not being a rule-taker. This aligns very neatly with the UK Government agenda of seeking flexibility to deviate from EU rules. It is an anathema to the EU.

Purely domestic insurers and brokers would welcome some relaxation of a range of rules that are part of EU membership, despite many of them being shaped by the UK. They certainly do not want additional rules, under Solvency II for instance, imposed without having any say.

The international insurers and brokers, including the big American groups, want alignment. They want to maintain seamless relationships with clients across borders and know this requires maintaining alignment with the EU’s rules.

Almost all the major insurers and brokers with significant cross-border business in Europe have already spent millions on preparing for the potential disruption of partial no deal Brexit by re-domiciling business elsewhere within the EU.

This worse case contingency planning could prove invaluable as insurance and financial services are going to be at the heart of the battle over future trade deals with the EU. Envious eyes are being cast towards London’s dominance of financial markets and countries are queuing up to make demands that suit their national interests. The UK’s lucrative financial services sector is already on the table as a major bargaining chip. For instance, Ireland has said it will deny UK financial firms access to its markets if its fishing fleets are not given access to UK waters. A divided insurance industry is going to find it very hard to persuade the UK government to defend its interests if the negotiations turn nasty.

The Conservative victory has also removed one uncertainty – the threat of Scottish independence. The Scottish National Party, which advocates independence, did well in the election, winning over 80 percent of the seats in Scotland. This, the SNP unsurprisingly argues, represents a huge mandate for a second referendum on Scottish independence, with the sub-text that it would be likely to produce a vote for independence.

It is extremely unlikely that the Johnson government will grant the Scottish Parliament the powers required to hold a referendum. The Prime Minister made it clear during the campaign that he was implacably opposed to this.

Even if a referendum was conceded, Scotland is still most likely to vote to remain part of the United Kingdom.

The UK’s First-Past-the-Post electoral system distorts the results, especially in Scotland where there are many three-way marginal seats that can be won with just one-third of the vote. This means the SNP won many more seats than its share of the vote justified. The pro-independence vote in the 2014 independence referendum was 45%. The SNP vote in the General Election was 45 percent. It suggests that support for independence hasn’t moved in five years.

Many in the UK, including those who voted to remain in the EU, have breathed a sigh of relief that the bitter, rancorous debate over how to respond to the 2016 Brexit referendum vote appears to be over. Mixed in with that sense of relief is an unhealthy portion of naivety. The hammering out of over fifty trade deals will be a decade long affair and there will be casualties along the way with the insurance industry among the most vulnerable sectors.