Insurers should take decisions soon about strategic options for their post-Brexit structure

As a matter of strict law, last week’s vote that the UK should leave the EU has no legal effect but serves as a mandate for the government to decide to leave and, in practice, an instruction to make that decision. The question posed in the referendum made no reference to the timescale for leaving.

Article 50 of the Lisbon Treaty contains the procedural requirements for withdrawal of a member state from the EU. Its key provisions relating to the triggering of the process and the timing of withdrawal are:

Any member state may decide to withdraw from the Union in accordance with its own constitutional requirements.
A member state which decides to withdraw shall notify the European Council of its intention. In the light of the guidelines provided by the European Council, the Union shall negotiate and conclude an agreement with that state, setting out the arrangements for its withdrawal, taking account of the framework for its future relationship with the Union…
The Treaties shall cease to apply to the state in question from the date of entry into force of the withdrawal agreement or, failing that, two years after the notification referred to in paragraph 2, unless the European Council, in agreement with the member state concerned, unanimously decides to extend this period.”

In his resignation speech on June 24 Britain’s prime minister, David Cameron, said whoever succeeds him should decide “when to trigger Article 50 and start the formal and legal process of leaving the EU”, effectively suggesting the start of the formal process for the UK’s withdrawal should be deferred for at least the next three months.

There were calls over last weekend from the presidents of the European parliament and the European Commission for formal exit talks to start this week. There was also some discussion in the media about whether the EU could treat as being a notification under Article 50 discussions that have now taken place at the European Council meeting on 28 June (probably the last such meeting which David Cameron will have attended).

However, it is now clear from remarks made by the council president, Donald Tusk, following that meeting that the EU accepts Article 50 will not be triggered until a new leader of the Conservative party and prime minister has been elected. Once Article 50 is triggered the UK will automatically leave the EU two years later, unless by the end of that period an agreement on the terms of the withdrawal has been concluded or the other 27 member states have unanimously agreed to an extension.

We do not know at this point whether it will be possible to conclude a withdrawal agreement within two years (or whether this period would be extended).

Future trading relationship

Any withdrawal agreement will deal only with the arrangements for the UK’s withdrawal from the EU, not their future relationship (although Article 50 refers to a withdrawal agreement “taking account of the framework for [the departing members state’s] future relationship with the Union”).

If there is to be any kind of future trading relationship beyond one based solely on World Trade Organization rules, it is distinctly possible the agreement governing that relationship (future relationship arrangement) would itself require ratification by every one of the 27 remaining member states.

We cannot know what a future relationship arrangement might look like or when it might commence. As to when it might commence, it must be quite likely there would be a transition period of several years between the date of a withdrawal agreement and the date on which the future relationship arrangement would come into force.

As to what it might look like, Boris Johnson asserted in his article in The Daily Telegraph on June 27: “There will continue to be free trade, and access to the single market… EU citizens living in this country will have their rights fully protected, and the same goes for British citizens living in the EU… British people will still be able to go and work in the EU; to live; to travel; to study; to buy homes and to settle down [and] the government will be able to take back democratic control of immigration policy, with a balanced and humane points-based system to suit the needs of business and industry.”

These comments, in contrast to the polarised nature of many made during the course of the referendum campaign, were clearly designed to steady nerves and provide some reassurance to the many people who voted remain. But until negotiations about the future UK/EU relationship are at least reasonably well advanced, we will have little idea whether they will prove to be correct.

Passporting insurers

Unless the UK’s future trading relationship with the EU involves membership of the European Free Trade Association and the European Economic Area (EEA) – or arrangements to similar effect – insurance passporting rights, under which an insurer authorised in one EEA “home” state may carry on business in any other EEA “host” state on the basis of its home state authorisation, either through a branch in the host state or on a cross-border services basis, will cease to be available.

For a UK-based insurer with branches in EEA countries that wanted to be able to continue to write the business conducted through its EEA branches at present, the loss of insurance passporting rights would necessitate either obtaining local authorisations for the branches or establishing (or acquiring) a subsidiary in the EEA to write EEA business on a passporting basis.

Similarly, an EEA-based insurer with a branch in the UK that wished to continue to write the business conducted through its UK branch at present would need to either obtain UK authorisation for the branch or establish (or acquire) a UK subsidiary.

And a UK-based insurer that writes risks situated in an EEA country from the UK on a cross-border services basis at present would in many cases need to establish a locally authorised branch or subsidiary (or a subsidiary incorporated and authorised in another EEA country which could write the risks on a passporting basis) to continue to write such risks.

In view of the uncertainty that will exist for some time about the nature of the UK’s future trading relationship with the EU and the timeframes that can be involved in obtaining additional authorisations and/or executing intra-group reorganisations, it may be prudent for insurers to which passporting is important to take decisions in the relatively near future about strategic options for their post-Brexit structure on the assumption that the passporting regime will not continue once the UK leaves the EU.

Article first published in Insurance Day