Millions of people living in the EU and the UK could see their insurance policies become redundant without a political agreement during Brexit negotiations.
That is according to a report released today by the Bank of England (BoE), which warns that legislation will be required in both jurisdictions to avoid widespread financial instability.
It highlights how there are around six million British customers that buy insurance from EU firms, and 30 million citizens in the European Economic Area (EEA) that hold policies with UK companies.
In addition, approximately £26trn of outstanding uncleared derivatives contracts between banks could be difficult to enforce without a new legal and regulatory framework in place.
"The BoE is right to emphasise the impending threat of insurance companies not being able to service cross-border contracts after Brexit," the Association of British Insurers director general, Huw Evans, said.
"This is an issue which needs addressing urgently via a political agreement to allow these policies to run on, to give customers certainty, and to prevent financial upheaval."
The BoE said that it would be difficult for financial companies to mitigate the risks of disruption to financial services on their own after the UK leaves the EU in March 2019.
It calls for a timely agreement on an implementation period to avoid disruption, highlighting how HM Treasury is considering all options for mitigating risks to cross-border financial services contracts.
"The last thing insurers want is to be left with the impossible choice of breaking a contract with a customer or to risk breaking the law," Evans added.
Despite the risks to insurance contacts and policies, all of the UK's banks have passed stress tests for the first time, leading the BoE to claim they would able to cope with no Brexit deal.
In this scenario, unemployment would rise by more than in the financial crisis, UK house prices would fall by 33%, and interest rates rise to 4%, but banks could continue lending money.
However, the BoE report adds: "There are many possible combinations of risks that could result from a sudden exit from the EU without a trade agreement.
"The outcome would depend on many factors, including the extent of contingency planning and government policies in the UK and EU."
