Insuring against a no-deal Brexit

UK insurers have been taking action to cushion the impact on their businesses of the UK leaving the EU without an agreement in place.

They have been setting up subsidiaries or branches in Europe to get around passporting issues and enable contract continuity even in the event of a worse-case no-deal Brexit.

With even international trade secretary Liam Fox suggesting there is a 60% chance the UK will fail to negotiate a satisfactory trade agreement or transition period by the time it is due to leave the EU next March, insurers have been taking action to ease the potential effects.

While a hard Brexit is unlikely to have much impact on domestic insurance business, it has the potential to prove highly disruptive to cross-border and international insurance business in both Lloyd’s and the company market.

However, Lloyd’s and most major insurers with overseas exposure who didn’t already have a presence in Europe have now established them (see panel right) because they anticipated that – with or without a transitional period – there would be a cliff edge at some point.

White paper

The UK’s Brexit white paper released in July, while proposing equivalent regulatory frameworks for the UK and EU at the end of a transition period ending in December 2020, issued a stark reminder that “nothing is agreed until everything is agreed”.

It also ended any hopes of maintaining existing passporting rights – which enable insurers to issue cross-border contracts anywhere in the EU and European Economic Area. But those with subsidiaries within the EU can apply for passporting rights.

Contract continuity

Perhaps just as importantly, subsidiaries can provide a way around the problem of contract continuity – which could see UK insurers unable to administer and pay claims on long-term insurance contracts in European Economic Area (EEA) jurisdictions where they are no longer regulated to operate.

This can be done by using Part VII Transfers to switch existing business with the EEA interests to the EU-based subsidiary, although in some cases insurers are unlikely to complete the process in time.

Alistair Kinley, spokesman for the Forum of Insurance Lawyers and director of policy and government affairs at law firm BLM, says: “There appears to be a high level of contingency planning across the industry and quite a few decisions to relocate or co-locate have already been taken to preserve passporting rights and access to the single market.

“That said, leaving the EU is a huge and unprecedented task for industry and government and a cliff edge departure next March would surely bring a risk that not all such necessary details are addressed in time.”

Contingent carrier clauses

There is still widespread hope that negotiations at a political level can produce an agreement to ensure contract continuity – an issue that the Bank of England’s Financial Policy Committee estimates could affect 10 million UK and 38 million EEA policyholders.

But insurers are also focusing on producing ‘contingent carrier clauses’ where UK and EU carriers can work together to protect clients’ interests against hard Brexit eventualities.

Kees van der Klugt, legal and compliance director at the Lloyd’s Market Association, says: “Lloyd’s has announced it is accelerating Part VII contingency planning but the industry should not be forced down this route, which is complex, expensive and time consuming for firms, regulators and courts.

“The area of contract continuity is probably the one where safeguards are weakest if there is a hard Brexit with no transition period agreed. This is where contingent carrier clauses may come into their own to give policyholders protection.”

Knock-on effect

Nevertheless, however well the insurance sector may have prepared, there is widespread acceptance that it still retains a degree of vulnerability to Brexit’s impact on the broader UK economy.

Mathew Rutter, insurance advisory partner at international law firm DAC Beachcroft, says: “The UK has a strong and thriving insurance market, and it is capable of withstanding the shock of a hard Brexit. However, the wider ramifications, both for the general insurance market and the UK economy as a whole, are harder to assess and prepare for.

“This is genuinely uncharted territory, so all the insurance sector can do is keep a constant look-out for problems that may impact them and their insureds.”

On this, as with most Brexit related issues, there is no shortage of insurers who emphasise the potential positives as well as the negatives.

Neil Clutterbuck, chief underwriting officer at Allianz Insurance, says: “We’ve already begun to see some repercussions from Brexit, including increased claims costs driven by higher inflation and a weakened pound, and we know it will pose many other risks to our industry, particularly with regard to the UK’s ability to trade within the EU.

“However, it may also bring opportunities, such as expansion into other markets. There may well be scope to do more business globally and for insurers to respond to customers’ changing needs. Remaining adaptable and informed will be key for both insurers and brokers as we enter this new period of uncertainty.”