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21 October 2016News

Warning: Brexit waves ahead

The United Kingdom’s decision to leave the European Union—after a long and divisive campaign—stunned many around the world and just as many in the country itself. The issue of what exactly will happen now is still wreathed in uncertainty.

What we do know is that the government of the UK’s new Prime Minister Theresa May has committed itself to carrying out the wishes of the electorate and has declared that at some point it will activate Article 50 of the European Union Constitution and trigger talks to leave the EU. What we don’t know is exactly when—or how long the talks will take. Or exactly what will happen and what will be agreed upon.

Uncertainty is something that global markets dislike intensely and the issues raised by Brexit will certainly take a number of years to work out. There is also the issue of how it will affect Bermuda.

The Island has its own government, but Bermuda is also an Overseas Territory of the UK and as such is tied to it in a number of legal ways. Of course Bermuda is not in the EU, but that isn’t to say that it won’t be affected by the Brexit vote; indeed, many Bermudians at this year’s Monte Carlo Rendez-Vous talked about the vote and how it will affect Bermuda.

The answer so far seems to be ‘not that much’, for a wide range of reasons.

“Brexit, or rather the Brexit vote, did not make it easier in itself for Bermuda to do business in the UK,” says Andrea Best, partner at legal firm Drinker Biddle & Reath.

“It’s more the fact that earlier this year Bermuda was declared equivalent for Solvency II in all respects, and that equivalence makes it more attractive for Bermuda to trade with Europe.

“So, one option that perhaps large insurance and reinsurance groups may have is that those companies who have operations in both London and Bermuda may now find it easier to write some European reinsurance business out of Bermuda that they have been writing out of the UK to date, thanks to the equivalence decision and because of the uncertainty over Brexit.”

As to whether Bermuda’s Solvency II equivalence might encourage companies to get involved with the Island perhaps earlier than they had planned, Best is cautious.

“It would really depend on the business plan of the insurer,” she says. “Perhaps people who are very focused on reinsurance might want to do that, but going from Bermuda into the EU might not work as easily for direct insurance, in the sense that the passporting regime does not apply in Bermuda as it does within the EU.

"Nothing has changed for Bermuda. We're still able to provide that level of support, that level of service to our clientele." Greg Wojciechowski

“If a UK company wants to find alternative ways to write direct business following Brexit then I’m not sure that setting up something in Bermuda would help much since they would still need to become authorised in Europe to write that business.

“For some companies Bermuda might be a very logical solution but for others it wouldn’t necessarily solve the obstacles they’re trying to overcome,” she adds.

“As for Brexit, we know from what the Prime Minister has said that Article 50 won’t be invoked this year, so we’ll have to wait and see what happens next year.

“Immediately in the wake of the Brexit vote some companies right away announced that they were considering setting up a separate company in Europe or taking similar steps outside of the UK, but it seems that we haven’t seen too many people really pulling the trigger yet.

“A lot of people are waiting to see what actually comes out of the negotiations. For example, if passporting is preserved in some format then perhaps it wouldn’t be necessary to take that extra step of establishing new operations in Europe. What I think we are more likely to see in this interim period is that if people have other operations within Europe as well the UK—which is common for some large insurance groups—then they may be considering shifting some business around, or at least taking comfort in the fact that they have a backup plan, rather than just going ahead and setting up something new. People are evaluating their business plans and waiting.”

Clarity required

The day after the June 23 vote Bradley Kading, president and executive director of the Association of Bermuda Insurers & Reinsurers (ABIR) said in a statement that: “Bermuda’s Solvency II equivalence finding by the EU will serve us well as the UK negotiates its multiyear transition out of the EU.

“Bermuda’s equivalence is unaffected by the UK vote. ABIR has excellent relationships with both UK and EU policymakers and regulators. ABIR members provide vital insurance capacity that makes UK and EU insurance markets more competitive. ABIR members will be reviewing corporate structures to determine what changes in their regulatory footprints may be necessary in order to conform with expected changes in European regulatory governance.”

The ABIR’s position has not greatly changed since then, other than to repeatedly call for clarity about what exactly will happen when the Brexit negotiations finally start, something that many other organisations and political institutions have also requested.

The lack of clarity has meant that some have realised the importance of making it clear that Bermuda is manifestly not the UK.

Bermuda’s strengths as a globally respected place to do business have been highlighted by the ongoing Brexit uncertainty, according to Greg Wojciechowski, president and chief executive officer of the Bermuda Stock Exchange (BSX).

“Bermuda has been a strong, solid business platform serving international clients and global commerce for over 70 years and although there are some highly specialised areas within that market, the platform as a whole is well supported,” Wojciechowski says.

“Whether that’s been through innovation, adding new lines of business, expanding what we do—the BSX is a great example of that—or other financial services, we’ve also seen evolution and innovation from the reinsurance industry and the specialty insurance industry which has been pretty indicative of the deep and mature infrastructure of the market,” he says.

He adds that Bermuda is now well known for the creation of captive insurers, property/catastrophe insurance and a variety of other lines including insurance-linked securities, and that it has been very interesting to watch that evolution take place.

“Other markets—particularly the UK market—are currently experiencing uncertainty as a result of the surprise that was the Brexit vote, along with the subsequent question of just what—and when—the next step will be with regard to that vote.

“However, nothing has changed for Bermuda. We’re still able to provide that level of support, that level of service to our clientele. And one thing that was excellent timing for us was the announcement that Bermuda has Solvency II equivalence, which is very important.

“It does a couple of things for us, it lets some of the uncertainty around Bermuda evaporate immediately, because the regulatory regime is certain, and it also shows the commitment of the Bermuda regulatory structure in continuing to meet and indeed exceed international standards,” he says.

One further reaction to the issue of Brexit could well galvanise politics on the Island. There has been an increase in the number of politicians in Bermuda talking about what might need to happen to change Bermuda’s constitutional status from a British Overseas Territory to that of full-blown independence.