Brexit and the threats it poses to Bermuda
On the same day that Bermudians go to the polls for the same-sex marriage vote next week, another referendum will be taking place some 3,500 miles away that will have a potentially greater impact on this island’s future prospects.
Britons will be deciding whether they want their nation to stay in the European Union, and the polls point to a close-run contest. While the question is simple enough, the repercussions of a vote to leave would be broad and complex. It is evident that much is at stake for Bermuda as the result of a decision in which we have no say.
Brexit seemed a distant possibility a few months ago, when the “remain” crowd held a comfortable lead. But with support for leaving the 28-country trading bloc apparently gaining momentum as the campaign runs into its final week, the world is having to face up to the very real prospect of a go-it-alone Britain outside the EU.
Given the multifaceted nature of Britain’s relationship with the EU, it is not surprising that there is so much uncertainty over what leaving would mean in practice. Withdrawal would require the unravelling of multiple legal, financial and budgetary rules, and trade deals would have to be ripped up and renegotiated from scratch. Relationships would be redefined, while rights and obligations that have been in place for decades would go.
Because no one can really know how it would all play out, both campaigns know it is difficult for anyone to prove their vision of a future outside the EU wrong. Hence, there have been starkly different scenarios painted, ranging from economic apocalypse to splendid isolation.
While the world will be watching closely, there is more at stake for British Overseas Territories such as Bermuda than for most.
Through the right to a British passport, Bermudians also have the right to work and to live in all European Economic Area countries, which include all EU member states as well as Switzerland, Norway, Iceland and Liechtenstein. No work permit is required and Bermudians with a British passport have the same rights as nationals of those countries in pay, working conditions and benefits. This has helped many Bermudians to pursue careers overseas, particularly in the international insurance industry.
A vote for Britain to leave the EU would likely take this privilege away for this and future generations of Bermudians. A post-Brexit Britain may opt to join the EEA, which has some of the features of full EU membership, including free movement of labour. However, given the Brexiteers’ focus on immigration control, it would appear unlikely that Britain would allow the free influx of people to continue. Hence the reciprocal right of Britons — and Bermudians — to live and work anywhere in the EU would surely end, too.
A vote to leave would have significant business impact. A report published by the UK Overseas Territories Association on the territories’ relationship with the EU stated that Bermuda exported €21.7 billion (about $24.5 billion) worth of services, mostly insurance-related, to the EU in 2014. Many of our commercial insurers and reinsurers have grown into truly global operations, and that staggering export statistic shows how the EU has become a key market for them.
Many of those insurers have operations in the Lloyd’s of London market, most notably XL Catlin and Hiscox. Lloyd’s insurers have unhindered access to the EU market through a passport system that allows them to trade and to establish branches in other EU member states. This smooth path to a market of 500 million people inevitably would become bumpier after Brexit. For one thing, Britain would have to attain “third-country equivalence” with the EU’s insurance regulation regime, known as Solvency II. Bermuda has already attained such equivalence after a six-year process. Even if Britain were granted equivalence automatically, there would still be hurdles to overcome.
As Sean McGovern, the chief risk officer of Lloyd’s, said: “An equivalence finding under Solvency II does not provide a solution. The UK would, under EU parlance, be a ‘third country’ and, whilst it may be found to have a regulatory regime that is equivalent to Solvency II, that does not confer a right to access the EU market either on a cross-border or on a branch basis.”
One could speculate at length about potential repercussions. The longer that renegotiation of post-Brexit Britain’s relationship with the EU were to drag on, the greater the cloud of uncertainty over London as a financial services hub would be. Bermuda may pick up some business that might otherwise have gone to London. The island’s insurers may shift some operations from the UK to Ireland or Switzerland to maintain untroubled EU access.
There is another potential impact from currency fluctuations. As said by Henk Potts, a speaker this week at the Bermuda Captive Conference, the British pound has fallen nearly 10 per cent since last November on Brexit fears and a “leave” vote would likely trigger a further 10 per cent drop. Such a shift would make a trip to Bermuda significantly more expensive for British visitors, who made up 7.6 per cent of the island’s air arrivals last year. The other side of the coin is that British imports would become cheaper.
In the past, Bermuda has proved itself capable of adapting to changing international circumstances and of seizing opportunities that arise. We must stand ready to do the same again.
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