British insurers are likely to be impacted by negative effects on the local economy from Brexit, although creating subsidiaries in the European Union will counter the end of passporting rights in the longer term, says AM Best.

The UK officially departed the EU on Friday.

The ratings agency says Brexit will have little immediate impact operationally on insurers in either the UK or the EU, but warns that “all UK insurers are likely to be affected by the impact of Brexit on the UK economy, at least in the short term.”

The effects “are likely to be negative,” it says.

A further weakening of the pound could increase claims inflation, and the UK could experience an increasingly challenging investment environment. If economic conditions do deteriorate, demand for insurance is likely to fall, lowering premium volumes.

During the next 11 months UK insurers can continue to underwrite European Economic Area (EEA) business via existing passporting rights. But from the end of the year these rights are expected to cease and UK-based insurers will no longer be able to issue insurance contracts in the EEA.

AM Best says most UK-domiciled insurers, such as Lloyd’s, the London market and other commercial lines writers have already ensured they are able to continue EEA operations, usually via new EU-based subsidiaries.

Some smaller insurers have formed relationships with local EU carriers that will be able to front business for them.

“For most retail non-life and life insurers, the loss of EEA passporting rights is not a significant issue as they underwrite principally domestic business or, in the case of large life insurers, have subsidiaries in both the UK and at least one EU country,” AM best says.

Most UK insurers have undertaken analyses to test the resilience of their capital positions to a range of disorderly and disruptive Brexit scenarios and, in some cases, have restructured investment portfolios or put specific hedges in place.

AM Best says any longer-term impacts will be dictated by the outcome of trade negotiations and decisions about regulatory equivalence between the UK and EU.