Expert View: Weighing up the Brexit options

The vote to leave the EU has potentially significant implications for UK insurers that write business in the 27 other EU Member States. Whilst there is still little clarity around the timing of exit and future terms of trading with the EU, insurance groups are starting to consider what Brexit might mean for them.

Insurers need to consider their options if passporting rights are not available. Some form of restructuring is likely to be needed. Lloyd’s is actively considering the options for that market.

The likely options will either involve having two licensed insurance entities - one in the UK and another in an EEA country to passport business from there - or having one insurer and using Solvency II’s third country insurer branch option.

A new EEA insurer could be created by merging the UK insurer with an EEA-based one or converting the UK insurer into a Societas Europaea and migrating it to another EU state with a subsequent subsidiarisation of the UK business if preferred. Where cross-border business is undertaken through branches of the UK company (rather than freedom of services licences) and there are only a few branches, rather than undertaking a full restructure, a firm could choose between local regulation of branches or converting the branch into a subsidary (the branch option may help prevent a loss of diversification benefit).

Although many restructuring options are plausible, few, if any, are “quick fixes”. The timeframe to plan and implement a new business model is likely to take between one and two years, given the regulatory, tax or legal approvals needed, and the volume of applications expected could slow this further.

Choice of domicile is likely to be a balance between the regulatory, capital and practical considerations, while being sensitive to people issues and minimising execution risk.

Groups will also need to consider the ability of the new regulator to accept substantial new insurance companies. Insurers that are slower to move could find their preferred jurisdiction does not have capacity to absorb them.

Finally, if the plan relies on mechanisms based on EU law (e.g. cross border mergers), it will need to be executed while these are still available if significant additional cost and complexity is to be avoided.

With no definite answers on what form Brexit will take, we suggest that insurers should examine how Brexit is likely to impact their businesses, noting that any plan may need to flex as the negotiations progress. Groups could also take this opportunity to consider whether their business model is fit for the future.

The earlier insurers draw up a plan with a realistic timetable, the more chance they will have of getting the necessary regulatory approvals and an outcome which protects and enhances their business.