Brexit and the European Insurance Market - An empirical Analysis of the Impact on the Structure of the European Insurance Market, Stock Market Reactions and the Solvency II Supervisory Regime. Market, Stock Market Reactions and the Solvency II Supervisory

Abstract

With the Brexit referendum, which took place on 23 June 2016, more than 50% of the British population voted in favour of the UK leaving the EU. This event is considered one of the most significant changes in the UK¿s economic history. Since that date, much speculation has been about Brexit impact on the global economy, also affecting the insurance market. Existing papers and literature indicate potential significant Brexit implications on the structure of the European insurance market due to the loss of the European Passport, the European Solvency II supervisory regime, as well as on stock prices of insurance companies based in the EU and UK, but so far there is no holistic view on this topic. The dissertation aims to bring together the fragmentary information on Brexit implications for the European insurance market, develop methodological approaches further, conduct new analyses, and reflect a holistic picture of the impact of Brexit on the European insurance market, focusing on the structure of the European insurance market, stock market reactions and the Solvency II supervisory regime.

The dissertation uses a mixed-methods approach to address the defined research areas. On the one hand, it uses the explorative approach of qualitative research to provide the current state of knowledge on the impact of Brexit on the structure of the European insurance market and the Solvency II supervisory regime post-Brexit. As qualitative research approaches, it applies a structured Solvency and Financial Condition Report (SFCR) content analysis and a detailed literature review. A structured SFCR content analysis helps to identify Brexit measures taken by insurance companies conducting cross-border insurance business between the UK and the EU and thus to analyse the impact on the structure of the European insurance market. Furthermore, a detailed literature review provides the current state of research on Solvency II post-Brexit as the basis for an innovative equivalence mapping discussion. On the other hand, a quantitative research methodology addresses the third research area. As part of this dissertation, a further refined event study approach on indexation and sub-indexation analyses Brexit implications on stock prices of EU- and UK-based insurance companies.

A total of 1.316 SFCRs from UK, French, German, Luxemburgish, Irish, and Spanish Solvency II insurance companies were analysed as part of the SFCR content analysis. Based on the results, it is evident that most Solvency II insurance companies writing cross-border insurance business between the EU and the UK dealt with Brexit and its consequences for their company at an early stage. Overall, setting up new insurance companies was the most common Brexit measure stated by UK-based insurance companies writing insurance business in the EU. As a result of Brexit, UK insurance companies set up a total of 34 new insurance companies based in EU member states. Regarding Brexit implications on insurance companies' stock prices, the event study methodology based on indexation and sub-indexation resulted in multiple significant daily and/or cumulative abnormal returns linked to the analysed Brexit events. There was also an indication that significant abnormal returns may depend on the share of insurance business written in the UK and on the location of the insurance company. Regarding the impact of Brexit on the Solvency II supervisory regime, a detailed literature review and an innovative equivalence mapping and discussion have provided proper insights. Although, based on the equivalence discussion, there is no significant non-compliance with the Solvency II equivalence criteria considering the changes resulting from the UK Solvency II Review and the Financial Services and Markets Bill, those initiatives have opened up room for a potential non-equivalence decision. Overall, the dissertation closes identified research gaps for the insurance market in the context of Brexit and introduces further refined research approaches which resulted in profound results.