The first 10 days: Following the Brexit bouncing ball in Canada
An anemic British pound will likely push insurance premiums up in compensation
The scene on the ground
Certainly shell-shocked Britons and Europeans are facing a major stall in their growth, according to the great majority of economists who studied Brexit’s implications. The British pound had gone into freefall before the votes were even counted (and by the time they were, it had lost 10 per cent of its value against the US greenback, hitting its lowest level since the mid-1980s). The loss of London’s reputation as an international financial hub also seems inevitable.
Many with their eye on the post-Brexit landscape in the UK shake their heads at the tragedy of a nation that had achieved a certain degree of success in its recovery from the 2008 financial crisis. Through 2015, it was the only country in the G7 to post economic growth in excess of 2 per cent for three consecutive years. And London had just started reporting that it had restored all the banking and insurance jobs the city lost to that global debacle.
The industry reacts
If Britain now plummets into fresh financial crisis, as many believe it will (annual growth in the UK is predicted to drop by one percentage point until 2018, a dramatic distinction from the 2.2 per cent hike the IMF predicted earlier this month for 2017), it could reverberate significantly through its flagship insurance sector. The insurance and reinsurance industries are, after all, among the region’s main business sectors. What’s more, property and casualty insurance typically grows in line with a country’s GDP.
Not surprisingly, big insurance players like Lloyd’s and XL Catlin nimbly issued statements in the wake of the vote that painted a scene of utter preparedness. Lloyd’s chairman John Nelson stressed that the exit would not take place for two years, and that repealing all EU legislation and regulations will likely stretch across the next decade. That, he underscored, means there’s lots of time for the industry to figure out its new path.
XL Catlin CEO Mike McGavick sent this message to clients and brokers following the vote and weighed in with this comment about XL Catlin’s Global Programs:
“Our underwriting appetite and capacity remain unchanged following the referendum. Fundamentally, we believe we are well-positioned given our strong global network and footprint which allows us to continue delivering for our clients, uninterrupted. At this time, policy wordings remain unchanged.
“Additionally, our global programs Centre of Excellence works around the world to ensure our policies are compliant across all applicable territories. They will work to ensure that any changes in UK law and regulations are reflected in our clients’ policies if and when appropriate.”
Economists believe that the Brexit results spell at least short-term volatility on world markets, a likely strengthening of the American dollar (at the expense of the Canadian counterpart) and an anemic British pound that will likely push insurance premiums up in compensation.
But what of the colonies? The UK is Canada’s third-largest trade partner, after the United States and China. Of the top 20 insurance companies in Canada, number two (Aviva), number four (RSA) and number five (Lloyd’s Underwriters) are based in the UK. Then there’s the preponderance of international insurance companies that have strong ties to Great Britain, like Switzerland-based Zurich Insurance.
Post-vote, financial stocks dragged the TSX to its knees before bounce backs eased some of the pressure last week.
The Canadian arms of the British giants have been sanguine in their response to their customers, distributors and employees. “While some customers may be worried about what the decision by the British people to leave the EU may mean for their policies, we remain committed to them and to our distributors, communities and employees in the UK,” Zurich spokesperson Sylvia Gaeumann says.
Besides, she reassures, “the process of the UK leaving the EU is likely to take years, so at the moment it’s far too soon to say how this will affect our business.” In the meantime, Zurich has set up a team to follow the process closely and will provide information to its stakeholders “as the process evolves.”
At Aviva, a company that traces its beginnings to 17th-century England, an “extensive analysis of the possible implications of a vote to leave the EU” has concluded that “it will have no significant operational impact on the company.”
That, said Aviva in an official post-vote statement, is because its operations in the UK are well capitalized, that it continues to be supervised by the PRA/FCA as lead regulator, and its European subsidiaries are incorporated and regulated locally and principally trade in their local market.
“Aviva has one of the strongest and most resilient balance sheets in the UK insurance sector with low sensitivity to market stress.”
Conceding that the vote’s results were not “what they had advocated,” RSA Group’s CEO Stephen Hester says his company is “well positioned to weather the resulting market volatility. But it will take time to understand [its] political and economic ramifications.”
For the short term, Hester says he doesn’t anticipate there being any change to RSA’s strategy or business plan. “With over 80 per cent of our earnings outside the UK and a strong balance sheet, it is business as usual for us. Our job is to serve our customers well. Over the centuries, we have remained true to this goal and we will continue to do so.
“The essence of democracy is to respect the views of the electorate and all will now work to find the best way to implement the decision.”