Brace for impact

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ITIJ 187, August 2016
In Douglas Adams’ comic science fiction work The Hitchhiker’s Guide to the Galaxy, representatives of a philosophers trade union demand ‘rigidly defined areas of doubt and uncertainty’. Sadly, the era of doubt and uncertainty that dawned with Britain’s vote to quit the European Union (EU) is far from being rigidly defined.
 
British disengagement (commonly referred to as ‘Brexit’) will not formally begin until the UK invokes Article 50 of the Treaty of Lisbon. Once that process is initiated, British departure becomes irreversible, with a two-year deadline. EU leaders want Britain to leave quickly, but the UK may take its time while it haggles over terms.  
 
Writing in the UK’s Guardian newspaper, commentator Joshua Rosenberg says describing Article 50 as a two-year process is ‘an oversimplification’: “The two years do not include the period leading up to a notification [of Article 50], which could easily be a year or more.”
 
After the process starts, negotiations could be extended if all EU members agree – but any one EU state can insist that the UK must leave when its two years are up.
 
Before the referendum, former prime minister David Cameron said he would invoke Article 50 immediately if Britain voted to leave. Instead, he resigned from his post, leaving the ticking time bomb in the hands of his successor, Theresa May.
Before becoming PM, May said she would not invoke Article 50 ‘until the UK has secured a better deal’ in pre-exit talks. However, EU leaders including Jean-Claude Juncker, president of the European Commission, and Martin Schulz, president of the European Parliament, want to see the process begin sooner rather than later. Brussels could force May’s hand by refusing to start discussions until Britain starts the Article 50 process.

"before the referendum, the Association of British Travel Agents (ABTA) warned that Brexit could have dire consequences for holidaymakers"

For many Brexiteers, the favoured outcome would be for the UK to retain access to the EU’s single market, while freeing British businesses from laws and regulations made in Brussels and Strasbourg and allowing Britain to control immigration. That is probably a pipe dream. Months and years of haggling lie ahead, and while Eurocrats have had decades to hone their skills at negotiating entry to the EU, Britain is the first member state to negotiate an exit. Don’t expect this to be a quick divorce.
 
A grey area
Travel and health insurers and the global tourism industry can only guess at what may happen to visa-free travel, open skies agreements, international payment settlement, reciprocal medical treatment for European Health Insurance Card (EHIC) carriers, and the entire EU regulatory framework. UK outbound holiday companies face short-term challenges as a result of currency fluctuations and faltering consumer confidence, and longer-term uncertainty makes it hard for the insurance sector to brace for the eventual impact of British departure – or even to know when it may finally happen.    
 
Before the referendum, the Association of British Travel Agents (ABTA) warned that Brexit could have dire consequences for holidaymakers. However, in a post-referendum statement, it attempted to allay fears over issues such as visa-free travel between the UK and the rest of the EU and the validity of the EHIC, stating: “Travellers are as free to move between the UK and the EU as they were yesterday, European Health Insurance Cards remain valid and regulations such as Air Passenger Rights remain in place. People due to travel this summer will see little changes to their holiday. Once the UK formally notifies the EU of its intention to leave, the remaining member states will have up to two years to offer the UK a deal for a future trading relationship and during this period holidaymakers will not see any immediate changes.”
 
ABTA also noted that ‘the fall in value of the pound will have an immediate impact on holidaymakers and their spending power overseas’. Sterling plummeted to its lowest level since 1985 following the referendum result.
However, holiday company TUI said that it did not expect a major downturn in the British market, which generates around one-third of the organisation’s turnover.
 
Inbound travel to the UK could perhaps be boosted as Britain becomes a more affordable destination for visitors from the eurozone, the US and other markets such as China. Russell Kett, London chairman of HVS, an international hospitality industry intelligence consultancy, predicts a short-term boost for inbound tourism to the UK but foresees softening demand for hotel accommodation within Europe while uncertainty prevails.
 
“Visitation to the UK is likely to be stimulated in the short term as the exchange rate suddenly makes the country more affordable for those from the US and the eurozone,” he said. “London hotels should be a particular beneficiary.”
A key issue for the travel industry will be renegotiation of the open skies agreements governing air travel within the EU and between the EU and the rest of the world. Airlines are desperate to see the UK stay part of a single aviation market, with British carriers operating freely between Britain and the rest of Europe, and EU-based airlines flying freely to and within the UK.
 
“A weaker pound may impact the cost of flights in the short term,” ABTA said. “In the longer term the UK government will seek to negotiate full access to the EU’s common aviation market, which has delivered the open skies arrangements we have today.”
 
Questions on market access will extend to destinations around the world, said the International Air Transport Association (IATA), which pointed out that the creation of a European single aviation market has led to the negotiation of agreements between global carriers and the EU as a single trading bloc. With the UK’s exit from that trading bloc, it would need to negotiate individual agreements, said IATA: “Depending on the terms of exit, these agreements would potentially cease to apply to the UK, possibly requiring it to negotiate a whole raft of separate bilateral agreements.”

"the ability to access the single market is of tremendous value for Britain"

While the broader tourism industry tries to come to terms with a post-Brexit world, it’s business as usual for travel insurers, most industry sources agree, until negotiations are complete.
 
“From a current perspective, there are no changes to policies and they remain valid – all existing terms and conditions still apply and if a customer needs to make a claim, they can do so in the usual way,” said Liz Kennett, a spokesperson for Aviva UK. “We’ll continue to monitor the technical implications of the vote to leave, which will only be resolved after several years of negotiating a new relationship between the UK and the EU. In the event this results in any changes to policy terms in future years, these will be clearly communicated ahead of coming into force.”
 
Looking ahead
For the longer term, the insurance industry has real concerns. High on the list are the future of the EHIC scheme and regulation of the insurance sector. The UK insurance industry still benefits from the freedom of trade agreement within the EU to be able to ‘passport’ into other EU countries, pointed out David Evans, managing director of insurance and assistance at Collinson Group.
 
“The ability to access the single market is of tremendous value for Britain and we expect the UK government to negotiate the best trade agreements that would allow us to continue to passport into other EU countries relatively easily as other non-EU countries do,” he said, adding that UK insurers doing business in the EU in a post-Brexit world will need to ensure that they comply with the regulatory framework of both the UK and the EU.
 
The Insurance Distribution Directive (IDD), formerly the Insurance Mediation Directive (IMD), will become law in EU member states by February 2018, and as Brexit is unlikely to take place by then, UK insurers still need to adhere to it.
“Existing rules under the Financial Conduct Authority (FCA) are underpinned by even stricter provisions and restrictive requirements in ensuring sound product governance,” noted Evans. “The UK can be said to be ahead of the curve in terms of its regulation standard.”
 
Kate Huet, managing director of International Travel and Healthcare, thinks it is unlikely that British travellers and expats will still be entitled to use the EHIC after Britain leaves the EU.
“The demise of the EHIC system is likely to have a major impact on insurance,” she said, “as the insurer must make the decision on where treatment is provided.”
As a result, insurers will no longer be able to move patients into state hospitals – an option that is currently widely used – and will instead use private hospitals, so travel insurance premiums are likely to increase. Excesses, too, may increase.
But not yet.
 
“While the EHIC is available, people will continue to take it up and renew their cards,” Huet predicted. “We may find that a card with 10 years’ validity will be honoured until expiry, in which case there could be a rush to acquire an EHIC.”
Joe Thomas, business development director of private medical insurance provider APRIL International UK – which has clients from 86 nationalities in 120 countries – suggested that ‘if the EHIC regime is dismantled, that would suggest a significant increase in demand for both short-term and travel insurance cover, as those who have relied upon EHIC for emergency protection would need to look elsewhere’. He thinks that the Brexit vote could result in an increase in business for the company’s short-term student and longer-term group and individual international private medical insurance (IPMI) policies.
 
Others argue that it is unlikely that either the UK or EU governments would want to ‘dismantle’ the EHIC scheme. They point out that many British movers and shakers hope for a compromise solution that would allow the UK to stay in the European Economic Area (EEA) after leaving the EU. Existing non-EU EAA states such as Norway, Iceland and Liechtenstein (plus Switzerland, which isn’t in the EAA but enjoys a similar semi-detached relationship with the EU) are part of the EHIC scheme.
 
Geoff Tothill, chief medical officer at International Medical Group (IMG), suspects the UK will continue using the EHIC or will develop another provision with member states, similar to Switzerland’s arrangement: “I can’t imagine the UK opting out of reciprocal healthcare agreements. There are lots of things in Europe that have to function as a group, and healthcare is one of them.”
 
Would the possible demise of the EHIC be a major issue? Perhaps not, suggests David Evans. It might even be a plus for insurers.
“Brexit does open up the possibility that British travellers might lose their right to the EHIC once the UK has officially left the EU,” he said. “This could be a positive for the industry as many people still mistakenly believe that travel insurance is not required if they have an EHIC. If British citizens are no longer entitled to use the EHIC in the future, travel insurers might actually benefit from an increased uptake of travel insurance policies as travellers can no longer rely on EHIC for medical treatment.”
 
The UK can work with the EU to achieve reciprocal healthcare arrangements similar to those already in place with non-EU nations such as Australia, but failing to reach reciprocal agreements will have an impact on claims originated in the EU since these can no longer be subsidised on that basis, said Evans: “Nevertheless, given how often travellers are treated in private facilities, and the current uptake of the EHIC and the restricted medical treatment covered by it, the impact on claims, premiums and excesses is likely to be limited.”
 
Tothill and his IMG colleague Philip Wright argue that travel medical insurance and IPMI already provide viable alternatives to state-funded cover.
“Prior to the vote, a lot of people didn’t realise that even with the EHIC, they may still have medical bills for care they receive outside of the UK,” said Wright, managing director of IMG’s European division. “On the government-issued card, it says ‘Make sure you have valid travel insurance’. It’s printed very clearly that the EHIC may not cover the full cost of treatment abroad.”
 
Misunderstandings about the benefits of the EHIC continue to pose a problem for travellers and expats, and will remain an issue if the UK – like Switzerland – decides to use the EHIC even when it is no longer a member of the EU, Wright believes. “With the EHIC, people have become used to travelling in Europe with some level of comfort about what medical cover they have,” he said. “Because the card is free and government-funded, they don’t often consider other forms of international health cover. However, without the EHIC, I’m worried that some people could have large medical bills they’ll struggle to pay, unless the UK makes another provision.”
 
Travel medical insurance and IPMI fill the gaps in cover left by the EHIC, and can serve as viable alternatives for UK travellers and expats, he added, while Tothill said that ‘IPMI provides a stable, consistent platform for delivering healthcare around the world’: “With a long-term IPMI policy, there’s consistency in what’s delivered to the client and when and how, whereas there’s much more variation in the delivery of benefits under the EHIC, which is subject to a lot of economic pressures. IPMI provides expats comfort knowing that their healthcare will remain the same well into the future.”
 
What of Solvency II?
Solvency II, the prudential framework introduced by the EU in 2016 to govern risk-based capital requirements for investments by insurance companies, is also likely to survive. Steve White, chief executive of the British Insurer Brokers Association, thinks it is likely to remain in place: “From a cost of implementation perspective and from an equivalence perspective, the UK would surely want to demonstrate that its insurer solvency requirements were at least the equal of universally agreed standards.”
 
Similarly, argues Kate Huet, the overall regulatory framework is unlikely to be impacted.
“Post Brexit, I would expect that UK insurers will still have to comply with EU regulations when doing business in Europe,” she said.  “However, it is important to note that existing UK insurance regulations are extensive. All insurers need is a physical presence in each EU country they do business in.”

"given how often travellers are treated in private facilities, and the current uptake of the EHIC and the restricted medical treatment covered by it, the impact on claims, premiums and excesses is likely to be limited"

Insurers who do more business in EU countries than in the UK may find that relocating from the UK to a European financial hub could make sense. But, as Kate Huet points out, it is important to question if there really are many specifically British insurers in the travel industry – or if they are, in her words, ‘effectively multinationals with a UK presence that serve the UK travel insurance market’.
 
For many, relocation may not be a very attractive option. “Many UK insurers already have European hubs so relocation might not be necessary,” said David Evans. “Those contemplating a move to the EU to safeguard their ability to trade will need to consider the investment costs, local employment regulations and detailed planning required.”
 
The reality is that the entire economy of the EU is now in play. That reality is only just beginning to sink in. For the next few years, travel insurers in the UK and their colleagues in the EU can only keep calm and carry on as usual.

Or, in the memorable words of that great European Winston Churchill: “Keep buggering on.”