Millions of people living in the EU and the UK could see their insurance policies become redundant without a political agreement during Brexit negotiations.
That is according to a report released today by the Bank of England (BoE), which warns that legislation will be required in both jurisdictions to avoid widespread financial instability.
It highlights how there are around six million British customers that buy insurance from EU firms. The central bank said a further 30 million policyholders in the European Economic Area will suffer unless Britain and the European Union draft new laws to ensure that firms can keep paying out on claims after the U.K. leaves the EU in March 2019.
In addition, approximately £26 trillion of outstanding uncleared derivatives contracts between banks could be difficult to enforce without a new legal and regulatory framework in place.
To ensure continuity of contracts with their EEA customers, some UK insurance companies are planning to transfer insurance contracts to legal entities located in the EEA that have the required authorisations. Such transfers can be done in bulk using the procedure in Part VII of the Financial Services and Markets Act 2000.
It calls for a timely agreement on an implementation period to avoid disruption, highlighting how HM Treasury is considering all options for mitigating risks to cross-border financial services contracts. “The last thing insurers want is to be left with the impossible choice of breaking a contract with a customer or to risk breaking the law," Evans added.
"This is expected to result in a significant increase in the required volume of such transfers, which is likely to be challenging in the time available," the Bank of England said.
In this scenario, unemployment would rise by more than in the financial crisis, UK house prices would fall by 33%, and interest rates rise to 4%, but banks could continue lending money. However, the BoE report adds: “There are many possible combinations of risks that could result from a sudden exit from the EU without a trade agreement.