Besides being a fun word to say, “Brexit” has suddenly become a historical term that will now appear in history books for years to come. Not more than 24 hours ago, as the votes were being cast in the United Kingdom, the clever term seemed to be headed for the dustbin of over-hyped media-coined phrases. The conventional wisdom was that the UK would remain part of the European Union, and “Brexit” would be forgotten much like “Grexit” was cast aside last year. The U.S. stock market certainly priced that expectation into the 230-point Dow Jones Industrial Average rise on June 23. The surprising victory for the “leave the EU” faction caused worldwide financial markets some whiplash, with the Dow falling 610 points on June 24. And just like that… Bam! The “Brexit” star is born.
Financial markets abhor uncertainty, and the now imminent departure of the UK from the EU will not be quite so imminent as there is a two-year process ahead for negotiating the terms of disentangling the UK from the EU. That means two years of uncertainty, and probably a few more surprises and unintended consequences. Welcome to the Brexit-induced damper on all things financial and two-year Chinese water torture of volatility. The Federal Reserve, along with the rest of the world’s central bankers are going to be doing an awful lot of re-thinking in the months ahead. I could be wrong (as I was about the Brexit-outcome) but I wouldn’t count on seeing anything that resembles a “normal” interest rate environment in the next two years. Heck, we might not even see another 25 basis point increase in U.S. interest rates for that long.
There are so many Brexit-related things to think about… there are many political implications and backstories, but at the heart of the Brexit-surprise seems to be a nationalistic fervor that sovereignty still matters. That could have parallels here on this side of the pond in November’s presidential election. Channeling Forrest Gump, “That’s all I have to say about that.”
Now, what about the effects on risk management and insurance? [I know, I know, you wondered where I was going with this Brexit rambling.] Well there’s great speculation today about the future of London as an international insurance hub. Not that it will cease to be an insurance hub, but more about what frictions and complications may be introduced by the need to re-structure firms, obtain new licensing, and yes, perhaps re-locating some resources, once the UK is no longer a part of the EU’s shared economic and regulatory framework. Will Brexit impede London insurance firms’ access to the EU markets? What about EU insurance firms serving the UK market? All fair questions, and all will need to be sorted out over the next few years. I realize it’s not the same, but I think it might be useful to think of Brexit in terms of the potential economic considerations that would arise if Michigan were to suddenly secede from the United States (Miexit?) and left us all to figure out how to transact business with Indiana and Ohio. It could kill the export market for Mackinac Island fudge! Oh the inhumanity that could be wrought.
More broadly, put your risk management hat on and think about the enterprise risk management dimensions of Brexit. Isn’t this one of those unique sorts of risks that ERM was intended to address? The political and economic risks associated with Brexit clearly fall into the strategic risk quadrant that traditional risk management relegated to the C-Suite, but ERM’s Chief Risk Officers are supposed to be ready for such vast strategic risks. So how are CRO’s with operations in the UK and/or the EU reacting today – particularly since most of the world was shrugging off Brexit as a soon-to-be non-event just yesterday?
Add Brexit to your list of worries, concerns, and market volatility triggers to monitor for the next few years. Oh, and one more piece of advice. Don’t check your 401(k) balance today. In fact, it’s probably best you just keep that long-term investor perspective and leave those statements unopened until, say, 2020.