Brexit’s potential impacts on and opportunities for Japanese insurers

2016-07-15

By now, you are aware of the Thursday, June 23rd referendum in Britain resulting in a small majority of British citizens choosing to leave the European Union – the so-called “Brexit”. The “Leave” outcome was quite unexpected and , thus, created much volatility in the financial markets, including the Japanese Yen surging to 52-week highs against the US Dollar, British Pound and the Euro and the Nikkei 225 correspondingly lost well over 1,000 yen that day. Speculation of the potential impacts of Brexit vote is currently rampant in the markets and, as such for Japanese insurers, performing a robust assessment of possible consequences should be of a particularly high priority in the search for more clarity.

Collectively, Japanese insurers have significantly increased their invested capital in the UK and Europe in recent years seeking higher returns than what is available in the perpetual low-growth and current negative interest rate environment of Japan. These capital outlays by Japanese insurers primarily include investing in Euro and Sterling denominated public and private debt and equities securities and in many cases Japanese Insurers own sizeable operations in the UK and Europe. For example, Mitsui Sumitomo Insurance recently acquired the UK insurer Amlin in 2015 for over US$5 billion.

For further context, the following table summarizes major Japanese insurers’ presence (including insurance operations, brokerages, investment advisory entities, research offices, etc.) in the UK and Europe with respective listed company stock price changes on Friday, June 24th:

Collectively, Japanese insurers have significantly increased their invested capital in the UK and Europe in recent years seeking higher returns than what is available in the perpetual low-growth and current negative interest rate environment of Japan. These capital outlays by Japanese insurers primarily include investing in Euro and Sterling denominated public and private debt and equities securities and in many cases Japanese Insurers own sizeable operations in the UK and Europe. For example, Mitsui Sumitomo Insurance recently acquired the UK insurer Amlin in 2015 for over US$5 billion.

For further context, the following table summarizes major Japanese insurers’ presence (including insurance operations, brokerages, investment advisory entities, research offices, etc.) in the UK and Europe with respective listed company stock price changes on Friday, June 24th:

Company/Group

UK

Germany

France

Nether
lands

Switzer
land

Spain

Italy

Others

Stock Price % Change

MS&AD Insurance Group

-12.40%

Sompo Japan Nipponkoa

-11.00%

Tokio Marine

-10.10%

Dai-ichi Life

 

 

 

 

 

 

-9.90%

Nippon Life (Nissay)

 

 

 

 

 

 

Unlisted

Meiji Yasuda Life

 

 

 

 

 

 

Unlisted

It is important to know that nothing has immediately changed in terms of complying with UK or European regulations and the “Brexiting” process itself will likely take many years to be negotiated and executed. However, for Japanese insurers, now is the most opportune time to begin detailed, integrated analyses across all aspects of the business to inventory and estimate the potential impacts and begin planning to address these effects – both short-term and long-term.

In the short-term, Japanese insurers – especially those with UK and/or European operations – are encouraged to immediately focus on the following:

  • Licenses – How are your insurance business licenses and entities structured in Europe and what effect will the UK’s potential loss of EU “passporting rights” have on your ability and cost to do business across the various countries?
  • Earnings – With the significant depreciation of Sterling and the Euro against the Yen, any profits coming from your UK and European operations will not be worth as much as expected just a few weeks ago. As such, annual budgets and projections need to be reassessed.
  • Capital – What is the current impact to your solvency measures? What changes should be considered to your investment allocations to reduce volatility while properly matching existing liabilities?
  • Customers – What impact will this have on customers’ behaviors (e.g., Japanese customers with non-Yen denominated life insurance policies)? How will you timely communicate and reassure your existing and potential customers if they voice concerns?
  • Stakeholders and Employees – How and when should you inform your stakeholders and your employees of the potential impacts to your firm and the related responses and actions being planned?

After assessing the short-term impacts and preparing mitigation plans for each, Japanese insurers should then quickly turn their attention to the assessing the longer-term effects including:

  • Growth Strategy – As the UK’s GDP growth rates are generally expected to slow regardless of which exit scenario may unfold, what aspects of your growth strategy need to be re-evaluated?
  • Location – As London is the primary financial services center in Europe and many insurers have their European hub located there, Japanese insurers may need to evaluate establishing a separate operational hub within a remaining EU city (e.g., Paris or Frankfurt given existing intellectual capital). This would also have tax implications that warrant careful consideration.
  • M&A – The Brexit vote resulted in a significant depreciation of the British Pound and the Euro. In contrast, the Japanese Yen appreciated against virtually all major currencies (including the US$). If this continues in the near term, UK and European insurers would be cheaper to acquire by Japanese insurers with large cash reserves.
  • Solvency – What impact will the Brexit have on the new European Solvency rules for which Japan is expected to follow in many respects? Given the UK has spent a lot of time, money and effort in implementing solvency II, it is more than likely that the UK will retain Solvency II. However, with the UK being out of the EU, this could lead to divergence over time between the UK’s version of Solvency II and that applied across Europe. As minimum, it would seem likely that the UK would want the UK regime to be granted equivalence to Solvency II and it would be likely this could be achieved. Nonetheless, insurance companies having operations in both of the UK and the EU may need to take additional actions required given the Solvency II equivalence is unilateral certification.
  • Legal & Regulatory – How well equipped is your organisation’s compliance infrastructure to quickly handle changes to laws and regulations especially in regards to matters such as business licensing requirements or product design rule changes?

In summary, Japanese insurers are encouraged to perform a detailed assessment of how their organisations might be impacted from a holistic perspective – financially, operationally, and strategically – and develop comprehensive response plans. Given expected ongoing volatility, these analyses and plans should be refreshed periodically and become integrated into the overall business planning process.

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