May 2016
The insurance industry will not be immune to the tangible consequences of a UK vote to leave the European Union (EU), according to minister for the Cabinet Office and Paymaster General Matt Hancock MP.
Speaking at an EU referendum debate hosted by The Insurance Insider this morning (18 May), Hancock warned that the projected fall in the value of sterling, restricted access to European markets and the uncertainty linked to the renegotiation of terms would negatively impact the insurance industry.
“You all know more than anyone that uncertainty carries a premium. Markets and credit agencies are already speculating about how the creditworthiness of UK firms might be affected,” he said.
“Moody’s has expressed the view that market volatility could reduce the value of insurers’ assets with consequences for their capital ratios, and a fall in the value of sterling assets would have clear implications for insurers, who are the largest holders of these assets.”
Hancock added that he believed the case for economic security against a Brexit was now unambiguous, pointing to the opposition of global organisations such as the International Monetary Fund and World Bank, and the concerns recently outlined by Bank of England governor Mark Carney.
“With the great uncertainty, it is hard to see how [Brexit] wouldn’t harm the insurance industry.”
The minister also argued it was vital for the UK to retain its seat at the top table to advocate its national interest when rules were being written which are applicable to the UK.
Pointing to the example of Solvency II, Hancock said the successes of securing the matching adjustment and EU recognition of reduced capital requirements for stable bonds backing British annuities showed the UK’s ability to help forge the regulatory environment in which business operates.
He said: “Most people in the market would say Solvency II is not perfect. But we have made concrete examples of our ability to influence its development and implementation.
“More importantly if we leave, we would still be subject to the same rules, because we would have to negotiate in the wake of leaving with the EU for some sort of equivalent status. So we would lose the ability to influence the rules in a meaningful way, and give up forever the chance to keep pushing beyond Solvency II to create a better level playing field by completing the single market for insurance services.”
Hancock also highlighted the importance of access to the single market, saying passporting arrangements for some bilateral trade deals and the ability to establish branches in other countries were key to the success of the London insurance market.
He said this access was the reason a quarter of European insurance companies chose to base their headquarters in the City of London.
He continued: “But the fact of London as the headquarters of the European insurance market is linked to our membership of that single market. For me, the fact that we are in that single market, but that we are out of the euro, and we are not part of the Schengen area, and have an opt-out from the Eurozone bailout funds, means that we have the best of both worlds.”
Responding to a question from the audience which asserted that a Brexit could be beneficial for small and medium-sized enterprises (SMEs) while big business remained firmly opposed, Hancock said people should listen to the pro-EU comments of Lloyd’s chairman John Nelson.
He said he entirely understood the argument that big business could easily comply with EU regulations, while small businesses struggled to adapt.
However, he pointed to surveys such as that conducted by the Institute of Directors, which showed a clear majority of SMEs were in favour of remaining within the EU.
The minister said he did not find this surprising, as businesses of all sizes now wished to trade on a global basis without significant barriers.
Another member of the audience queried whether regulations such as the abortive post-crisis proposal for a financial transactions tax (FTT) highlighted the risks of remaining within the union.
Hancock responded that the FTT was a “perfect example of how the UK could make an argument and win it” by making sure other Eurozone countries would be unable to overrule the UK in the future.
He said: “We made the argument pretty effectively against the FTT and we have won that argument. I think it’s a really good case for having our voice at the top table.”
