Stakes high for UK brokers as Brexit day approaches

Everybody seems to be an insurance expert these days, even Michel Barnier.

In a recent speech, the EU’s chief Brexit negotiator defended the bloc’s insistence on not allowing a time limit on the now infamous Northern Ireland backstop by comparing it to a home insurance policy.

However, this new-found interest doesn’t seem to extend to the nitty gritty implications of what the UK’s withdrawal will mean for the sector.

And Brexit cliff edges don’t come much starker than that facing UK insurance brokers doing business in the EU.

The stakes are high if the EU and the UK are unable to reach an agreement by 11 pm on 29 March, says Steve White, chief executive of BIBA.

“If we get no deal, we get no transition period and access to the European market we currently have.”

Christopher Croft, chief executive of the London and International Insurance Brokers’ Association (LIIBA), says the ‘worst-case scenario’ of no deal could be aeroplanes grounded across Europe because they can’t be insured.

“The ripple effects could be pretty serious,” he says.

The reason for this is the way that the Insurance Distribution Directive, the set of regulations that govern all brokers within the EU, was drafted.

The so called ‘political agreement’, which lays down the broad template for future EU-UK relationships, allows for ‘enhanced equivalence’ in financial services.

Equivalence

Equivalence means that the EU and the UK would allow free trade in financial services provided each broadly mirrors the other’s regulations so that neither was able to secure an unfair competitive advantage.

But while there are provisions for equivalence in many EU financial services directives, like Mifid II, they are missing from the IDD.

“The fact it’s not there is a big gap,” says White.

Nobody seems sure why equivalence provisions are missing. Croft suspects that the way the directive has been drafted reflects the parochial approach that financial regulators in most EU member states take when it comes to insurance.

“They were never drafted with the idea of insurance being traded across borders. Most European regulators, when they think of insurance, think of home and motor and very little of that is traded across borders.”

The key sticking point is Article 16 of the IDD which can easily be interpreted to rule out EU policy holders from seeking insurance or reinsurance capacity from outside bloc through a broker not licensed within its jurisdiction.

Of course, this wasn’t an issue for the UK when the directive was being hammered out earlier this decade.

“It doesn’t matter at the European level where it takes place as long as we are all in the EU,” says White.

But the lack of an equivalence provision means that where the activity takes place will matter a lot on 29 March if there is no deal.

“In the event of a no-deal Brexit, the issue becomes one of interpreting where an activity takes place for regulatory purposes,” says Croft, whose members work with underwriters in the Lloyds market.

“Some EU regulators say that if either the client or the risk is located in the EU, regardless of where they are physically, they are providing services in the EU and need a licence to do that.”

This kind of strict interpretation of the directive throws up enormous challenges for relationships between retail brokers across the EU and the London market’s wholesale brokers, says Croft: “I can’t see how that model remains viable.”

Even setting up a subsidiary within the EU of a London market-based operation could be ‘fundamentally challenged’, says Croft.

One option might work, Croft adds: “The only model that might remain viable is to have a branch of an EU entity in London that is itself FCA- (Financial Conduct Authority) authorised to offer intermediary services both here and in the EU: both need to be authorised in the EU.”

Rocky ground

And even this could be on ‘rocky ground’, Croft says, because it could be argued that it runs counter to the directive’s intent on third party countries.

“At the moment, there is a lack of clarity on post-Brexit models that will be available for UK brokers with EU portfolios”, says Nicolas Aubert, head of Great Britain at Willis Towers Watson.

White acknowledges that it is “possible” that UK brokers will no longer be able to serve EU clients, putting at risk the approximately £8bn worth of EU business that is placed in the market.

Croft says that EU business accounts for around 15% of the London market’s turnover.

But the EU too would lose out from the loss of the specialised broking expertise available in the London market, he warns.

“It (London) delivers coverage that clients would struggle to get elsewhere. The impact on economic activity in the EU if those corporates were unable to obtain that cover would be significant, and I’m not sure that’s been fully appreciated.”

The European Commission is tight-lipped, either because it hasn’t drilled down into the implications of the issue or possibly because it sees it as one that can be exploited in negotiations with the UK.

In turn, the EU’s insurance regulator EIOPA is hamstrung by the lack of guidance from its political masters at the commission. National regulators also remain in the dark about how they should apply the IDD to UK firms operating in their jurisdictions from Brexit day onwards.

One of the industry’s problems is that brokers’ concerns are little understood outside the industry, says Croft.

One group who may help to get the message are the risk managers at the large EU corporates.

Aubert, who is also a former chair of the London Market group, will be speaking at the annual conference of the French risk managers association next month to highlight UK brokers’ concerns about the risks to the sector posed to the IDD.

Equivalence on its own isn’t an ideal solution, because it can be withdrawn at 30 days’ notice, providing little comfort for those dealing with annual contracts.

Nevertheless, it offers UK brokers continued access to the market during the 18-month transition period that is currently on the table in the EU-UK withdrawal agreement.

White says: “If we get a transition, at least it would give our negotiators an opportunity to try and negotiate something a little broader than we are currently looking at.”

LIIBA’s focus is on lobbying for the UK not leave without a deal while seeking to tweak the wording of the IDD to allow an equivalence, Croft says “It gives 18 months breathing space so we are still effectively part of the passporting regime , at that point would seek to turn the discussion on how to create an equivalence regime.”

In the meantime, White says that the BIBA has set up an arrangement with the World Broker Network.

Under this arrangement, the UK brokers could introduce their EU customers to WBN members, who operate across the EU’s member states.

But while a useful fix, it’s not a long-term solution, White says: “Clearly that means the UK broker misses the client contact for the European risk.

Some UK brokers have a big enough European exposures to set up a business in the EU, but many won’t be able to, he says: “If you are a small enough broker, you wouldn’t have the means to do that which is where the WBN arrangement will come in very useful.”

One of those that is big enough to set up its own arrangements is Willis.

Aubert says that WTW is planning to use its Belgian subsidiary to ensure that its clients continue to receive the full spectrum of services that it offers

“As a large global broker, we are well positioned to help clients post-Brexit, we have wholly owned business operations across most EEA (European Economic Area) countries. This is something we can do but smaller brokers without the scale we have face difficulties.”

Smaller brokers can guard themselves against challenges by making sure that they have thorough document and showing that they have taken the right advice, says Croft: “Financial service regulation is like GCSE maths where you get 90% of the marks for the working out:”

He still pins his hopes on the mutual interest that the EU and the UK share in securing a deal.

“In a rational world, there should be an easy deal to be done because of that mutual interest.”