A brief status-update on Brexit and the effects on the insurance market - form our insurance team
Speaking at a Centre for European Reform conference in Brussels in November 2017, European Union Chief Negotiator Michel Barnier stated, ‘[the] UK will lose the benefits of the Single Market. This is a legal reality.’ The implications of this were clear: UK insurance companies would no longer be able to rely on “passporting” rights. This was confirmed by British PM Theresa May in the Brexit White Paper released earlier this year. In the section on financial services, May stated, ‘[the] UK can no longer operate under the EU’s “passporting” regime, as this is intrinsic to the Single Market of which it will no longer be a member.’ Through the “passport regime”, insurance companies based in the UK currently have the right to provide services in the EU. Similarly, EEA insurance companies can operate in the UK.
The UK and EU have agreed in principle to a transition period from 29 March 2019 until 31 December 2020. During this time (re)insurance businesses will continue to benefit from the passporting regime. However, the question as to how European insurance firms may operate in the EEA and, conversely, how EEA insurance companies may operate in the UK post-Brexit remains. This will become clearer as negotiations are finalised.
The EU currently runs a third-country equivalence regime, whereby the EU establishes whether the insurance regulatory regime of a non-EU country is equivalent to Solvency II for the purposes of group solvency calculation, group supervision and reinsurance. There were discussions over whether this could be a viable alternative to passporting for UK (re)insurers. However, this was met with strong opposition from the EU. Philip Hammond MP, British Chancellor of the Exchequer (i.e. Finance Minister), also noted that such a regime would be ‘wholly inadequate for the scale and complexity of UK-EU financial services trade.’
In February 2018, the European Commission published a statement outlining the legal repercussions for parties involved in the insurance industry in case no equivalence agreement was to be made. British insurance firms would no longer benefit from the Solvency II authorisation which currently allows them to provide services in the EU. This is because the UK would be considered a “third-country”. As such, branches of UK insurance businesses will become branches of third-country businesses. A branch will need to seek authorisation from the member state in which they carry out their activities (and comply with conditions outlined in Article 162 of the Solvency II directive). UK reinsurance undertakings will have to adhere to conditions set by the EU country in question. The European Commission drew attention to the fact that these conditions “cannot be more favourable than those applying to reinsurance companies from the EU” and that the conditions may differ from country to country. It is important to note that such authorisation would not permit the branch to conduct business in other EU countries. Such an Article 162 authorisation will have to be obtained in each EEA country.
By establishing a subsidiary in an EU or EEA-state, the relevant subsidiary returns as an EU or EEA-company providing it with “passporting rights”. Yet, an opinion from The European Insurance and Occupational Pensions Authority (“EIOPA”) of July 2017 warned EU member states’ supervisory authorities against permitting excessive outsourcing by EU entities to entities located outside the EU. If EU member states’ supervisory authorities heed this warning, UK (re)insurers cannot necessarily outsource significant parts of the business operation to the UK parent, once it has established an EU subsidiary.
With regards to EEA insurers, the most obvious solution would be to similarly establish a subsidiary in the UK and seek authority from the relevant authorities there.
Among the most pressing issues is the matter of “contract continuity”. Christopher Croft, Chief Executive of The London & International Insurance Broker’s Association (LIIBA), explained in the wake of the release of the Brexit White Paper that ‘[there] is some doubt as to whether UK insurers will remain licenced to pay claims in a few EU countries without an agreement.’ EIOPA’s opinion on this, issued in December 2017, stated that UK (re)insurers would not be authorised to carry out (re)insurance contracts post-Brexit. As Nicky Morgan MP, chair of the House of Commons Treasury Select Committee, put it, UK firms will be forced to either “break the contract or break the law” when deciding whether to pay claims of EU policyholders. According to the Europeans Commission’s interpretation of Solvency II Directive, it is the responsibility of the insurance firm to notify policyholders about the impact on the provision of insurance services that may emerge from the UK’s withdrawal from the EU. The Directive also states that insurance firms will need to take measures to ensure that contracts can continue to be serviced, according to the European Commission’s understanding of it.
EEA insurance companies operating in the UK will also face challenges. However, the UK government has shown itself to be more amenable. On 20 December 2017, The British finance Ministry (i.e. Her Majesty’s Treasury) stated that the UK government will legislate to provide EEA firms operating in the UK with temporary permissions. This would allow such firms to continue to operate in the UK and ensure that contractual obligations, including the payment of claims, can be met. However, the length of the temporary permissions is still unclear. It was stated in a letter by Sam Woods, the CEO of the Prudential Regulatory Authority (PRA), ‘that in the unlikely event the withdrawal agreement is not ratified, this provides confidence that a back-stop will be available’.
What is certain is that there still remains a large degree of uncertainty regarding how UK and EEA insurers may operate in the EU following 31 December 2020. Nevertheless, regulators have made it clear that insurance businesses need to make preparations in order to seek authorisation from the relevant authorities and begin business transfer processes. The transition period provides a breathing space to do so.
 Letter of 28 March 2018 to EEA firms with UK branches from Sam Woods, the CEO of the Prudential Regulatory Authority (PRA), http://www.hfw.com/downloads/HFW-Brexit-Considerations-Insurance-June-2018.pdf