"Steven, how will the out vote impact the insurance industry?"
I have been asked this simple question several times since Friday morning - including by the author of this piece.
In short, I have no idea, but I am sure of one thing – premiums will increase in the short to medium-term due to a number of factors. I have a few hypotheses as to why this will happen and a few strong assertions. I set these out below to encourage debate and thought on this important subject.
For the avoidance of doubt, it is unlikely that any industry players would see most of these as a positive.
- Reduced returns for insurers will drive higher insurance premiums for consumers. Markets hate uncertainty and we have plenty of that right now. Uncertainly dampens demand, which in turn reduces returns. Also the base rate is likely to be reduced further to close to, or even, zero. Lower returns mean that insurers will earn less on their assets that back insurance premiums and hence they will have to increase customers' premiums to compensate.
- Offshore-regulated insurers will have to come back onshore. Many providers of discount insurance today (think offers you see in the newspapers and on the trains for very cheap travel insurance) have been able to support their low-cost operations by being domiciled and (importantly) regulated overseas, e.g. in Malta. They rely on the EU’s so called "passporting" rules that allow them to operate anywhere inside the EU as a function of being regulated in another of the EU states. The FCA has not made any mention of their intention to end this practice, but I am sure that such a decision will be reviewed in the coming months.
- Withdrawal of EU insurers will diminish competition & drive higher prices for consumers. While a number of continental EU insurers have already reaffirmed their commitment to the UK insurance market, it can surely only be a matter of time before the withdrawal of some of those offerings which are only marginally profitable. Fewer offerings mean less competition. Less competition means higher prices.
- Travel Insurance will get more expensive as EHIC & E111 are scrapped. One of the reasons why European travel insurance is low cost is because there is the presumption that should a policyholder fall ill while overseas that they will be treated in a local hospital on the reciprocal healthcare arrangement that exists across the EU and therefore not require expensive repatriation. If this reciprocal arrangement falls away, then policyholders are likely to make larger claims and so premiums will have to increase to compensate.
- Demand for Redundancy Cover might increase. With increasing uncertainty over job security, it is possible that more consumers might seek to protect themselves from losing their employment through buying Unemployment Cover, separate from anything that they might already have tied to their mortgage.
- Gender-specific pricing might return. One of the less-justifiable EU laws was that of abolishing gender-specific insurance rates. Under rules, which came in to force at the end of December 2012, insurers were not permitted to charge differential rates to men and women. So motor insurance premiums for seventeen-year-olds are set equally for male and female drivers, despite the well-known fact that teenage boys have a worse driving record than teenage girls. Consequently, girls pay higher premiums than they would have done before the rule change. The same principle applies, but in the other direction, when it comes to annuity rates: male and female rates have to be set equal, despite the fact that women live longer than men. In this example, men end up with higher annuities than they would have done before the change. Most (all?) experts believe that this rule is bonkers and it is possible that the UK might push to repeal this law.
How much of the above becomes a reality I have no idea, but one thing is certain: the insurance industry is about to enter a period of significant change and with change comes opportunity.