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26 January 2017

Commercial Risk Europe: UK insurers’ financial strength ratings likely to survive Brexit: AM Best

The financial strength ratings of UK insurers are unlikely to be downgraded by their government’s plans to exit the EU, according to AM Best. However, uncertainties surrounding Brexit, and in particular the effect on EU passporting rights, are a concern for insurers, the rating agency added.

Catherine Thomas, a senior director at AM Best, said: “Increased economic and regulatory uncertainty, as well as the potential for higher barriers to trade, overall, is a credit negative for the UK insurance industry,” But she added that financial strength ratings are likely to remain intact.

Ms Thomas said commercial insurers that currently draw strongly on EU passporting rights will have to consider the costs and operational requirements of establishing a new EU subsidiary.

“The ability to continue to conduct cross-border business throughout the EU is principally a concern for Lloyd’s, the London market and other commercial insurers. To continue to underwrite EU business, these companies are likely to need to establish an EU-domiciled subsidiary, if they do not already have one,” she said.

AM Best added that any negative impact on the UK economy as a result of Brexit would also be a concern for the insurance industry and premium volumes. “An economic downturn could impact capital adequacy if widespread corporate downgrades affect the credit quality of UK insurers’ investment portfolios,” AM Best said, although it added that this is not expected in the short term.

UK insurers will fall outside EU regulations, including Solvency II, if their country exits the single market. But AM Best said the UK is “likely” to be granted equivalence with Solvency II, allowing UK insurers to continue to place business in Europe.

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