General Insurance Article - Brexit risks UK economy warns S&P


A U.K. referendum vote in favor of leaving the EU could pose a risk to growth prospects for the U.K. economy and its financial services sector, says Standard & Poor's Ratings Services in a report published today.The U.K. will hold a referendum on whether to leave the EU by the end of 2017.

 "We believe it could significantly dent the U.K.'s current net trade surplus in insurance and financial services of more than 3% of GDP," said Standard & Poor's credit analyst Frank Gill.
  
 "However, the extent of this impact will crucially depend on what alternative free trade arrangements the U.K. government could agree with its European partners in the event of an exit," said Mr. Gill.
  
 Financial services attract 30% of the inward foreign direct investment (FDI) into the U.K., equivalent to 17% of GDP. Nearly one half of the FDI into the U.K. financial services sector comes from EU investors. While we think London would maintain its status as a global financial center in the event of a Brexit, global banks could ultimately consider other locations as bases for their European operations. This is because U.K.-domiciled banks use their U.K. authorization to provide banking and trading services across the EU and European Economic Area, known as passporting rights. Without these rights, we see a risk that enough major global banks could choose to route their business through other European financial centers.
  
 The impact for domestically orientated U.K. banks would likely be indirect and potentially modest, the report says. However, they could feel the knock-on effect on the vitality of the U.K. economy and the creditworthiness and activity of its actors.
  
 For insurers, a Brexit would likely entail additional costs of doing business in Europe, although we do not expect their operations would be significantly curtailed. While the EU represents about one-third of the U.K.'s very substantial financial services net export surplus, the insurance sector in the U.K. is far more reliant on trade with non-EU countries, especially the U.S.
  
 The impact of a Brexit on the U.K. financial services industry would depend to a great degree on what trade agreements the U.K. government could make to replace EU membership, the report says.
  
 "Given that the U.K. operates the second-largest current account deficit in the world, to put at risk one of the few net exporting sectors via a highly politically charged referendum would in our view pose substantial risks to the balance of payments, the currency, and the economy," said Mr. Gill.
  

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