Insurance bracing for Brexit – Analysis

In all likelihood, withdrawal from the Single Market will end passporting rights – which enable insurers to issue cross-border contracts anywhere in the EU and European Economic Area (EEA). According to the Chartered Insurance Institute (CII), passporting currently facilitates around £8bn of insurance business going from London to the EU and a further £6bn going in the opposite direction.

Insurers will also no longer be able to lawfully service existing cross-border contracts.

David Gittings, chief executive of the Lloyd’s Market Association (LMA), says “The question is increasingly urgent for UK insurers and reinsurers. Annual policies issued as early as April next year would be impacted by a no-deal Brexit the following March. Longer-term contracts that extend beyond March 2019 would obviously be affected too, and run-off and claims handling where there are EU interests could become problematical.”

Other issues in need of resolution are the possibility that UK insurance will not even be recognised in Europe and the potential absence of regulations governing cross-border insurance disputes. Additionally, of particular relevance to reinsurance, there is no actual guarantee that the UK will be granted regulatory “equivalence” to the EU.

Government activity and insurance

Evidence of recent government activity relating to insurance issues has been limited to correspondence last September between Treasury Committee chair Nicky Morgan and Chancellor of the Exchequer Philip Hammond about how cross-border contracts will be managed after Brexit.

Nigel Teasdale, president of the Forum of Insurance Lawyers (FOIL), says “The Chancellor’s response recognised the potentially adverse impact on continuity of service at the point of exit. The ambition is to put in place arrangements for reciprocal regulatory regimes and to negotiate a time-limited interim period to avoid a cliff edge during the transition.

“He did, however duck the question of whether the government intends to publish a paper specifically with regard to insurance contracts.”

With some issues UK insurers and brokers must simply hope that the politicians come to suitable arrangements. But with regard to the loss of passporting rights and the ability to service existing business there are at least steps they can take if negotiations fail.

Future business

The hope is that a system roughly equivalent to current passporting can be agreed at a political level. But, if not, UK firms can establish subsidiaries within the EU – which can apply for passporting rights.

So far insurers have been far more active in this respect than brokers. The results of a DAS business confidence survey of 250 brokers published this October found that only five had made contingency plans to move part or all of their business operations to the EU once the UK has withdrawn.

Nevertheless, a recent member survey by Biba found that some 63% of respondents did actually have concerns about Brexit. The lack of broker action is therefore probably explained by concerns about the costs involved.

Some international insurers have taken no action because they already have subsidiaries in Europe. An Aviva spokesperson, for example, reports that Brexit “does not result in any significant operational impact.”

But others have announced the setting up European subsidiaries or a commitment to do so, and those who have made no public statements have been working hard behind the scenes. They realise that, even though the UK government is seeking a transitional period of around two years, there could still be a cliff edge at some point.

Jon de Beer, senior adviser to the ABI’s director general, says “Effectively all insurers are contingency planning for this and have been speaking to their regulators and advisers. Then it becomes a commercial decision as to whether to continue to write business in Europe or not.”

Costly undertaking

Insurers have been attracted to setting up operations in Dublin, Brussels, Luxembourg, Amsterdam and Paris. But the exercise can involve disruption and inefficiency, not to mention significant costs.

Most expense relates to regulatory requirements to hold capital, which for large insurers can run into tens of millions of pounds.

Mathew Rutter, partner at international law firm DAC Beachcroft, says “The very minimum the whole exercise is likely to cost any insurer is in the region of £10 million, but it may take time to filter through to premiums.”

In the context of the capital costs the “opinion” sent this July by the European Insurance and Occupational Pensions Authority (EIOPA) to national regulators warning that UK companies relocating must transfer significant operations to their EU offices has proved a relatively minor issue.

Mark Nicholson, primary credit analyst at S&P Global Ratings, says: “I’m not aware of any significant changes to companies’ plans post the brass plating announcement. It is, however, likely, that many of the continental subsidiaries will be quite thinly staffed, if not full-on brass plate operations.”

Existing business

The hope is that a grandfathering agreement can be reached at a political level to guarantee that existing contracts can be continued over their lifetime after Brexit. Otherwise, insurers can use Part VII transfers to shift existing policies to EU based operations.

But Part VII transfers, in addition to having to go through a court process, need approval from the Financial Conduct Authority (FCA) and the Prudential Regulation Authority (PRA).

Although neither regulator would comment on the issue, it is understood that, because they are so busy, the transfer process may take 18 to 24 months – meaning that cases may not be completed by the time the UK leaves the EU.

Considerable optimism

Nevertheless, there are many commentators who feel that Brexit will not severely impact on London’s pre-eminence as an insurance centre. They stress it has formidable regulation and insurance expertise and can continue to capitalise on many fast-growing global insurance markets. Perhaps most important of all is the realisation that a good deal is in the EU’s own interests.

Jeremy Irving, partner, corporate insurance team at international law firm DWF, says “In my opinion it’s even more important for European insurers to get a good solution than it is for our own insurers as they want access to London and the gateway it provides to the rest of the world.”

Common sense suggests that many of the problems involved should be ironed out within a transitional period but common sense also suggests that insurers and brokers should prepare for a scenario in which this doesn’t happen. Fortunately, most insurers are already doing this and the closer we get to a cliff edge the more we should see brokers following suit.