The London insurance market's position on the potential impact of the UK voting in a referendum to leave the EU is at best cautious, where some are taking a neutral position seeing threats and opportunities either way. However, certain notable figures such as Lloyd's Chief Risk Officer, Chief Executive, and Chairman, along with the Chairman of BIBA and certain senior representatives of the Companies Market have been clear that they are concerned about the possibility of Brexit.
The main areas highlighted for concern are the loss of the following current competitive advantages which exist as a result of the UK being an EU member state:
- London is a global hub for insurance/reinsurance;
- The UK insurance market has access to the EU Single Market through passporting rights;
- UK membership of the EU encourages direct foreign investment into the UK;
- The UK benefits both directly and indirectly from trade agreements the EU has in place and may negotiate in the future;
- UK membership facilitates trade with countries outside the EU; and
- The UK has involvement and influence on EU decisions on regulation.
But what are the legal implications affecting the insurance market? Some possible effects of Brexit on the law affecting the London insurance market can be broadly categorised into the following three areas:
- Underwriting; and
- Policy wordings and claims issues.
The freedom to provide insurance and reinsurance services from one member state into another member state stems from the EU Insurance Directives and the Reinsurance Directive (all now replaced by the Solvency II Directive) and the Insurance Mediation Directive. These provide that if an insurer or intermediary is authorised to carry on insurance or mediation activities in the member state where it has its head office, that authorisation is valid for the whole of the EU. There are similar but not identical arrangements in place with countries in the European Economic Area (EEA).
These rules allow international insurance and broking groups to trade in the EU from a subsidiary authorised in the UK. The exercise of this right is called "passporting".
In theory, passporting into the EU from a UK authorised insurer or intermediary would no longer be possible following Brexit unless the UK became part of the EEA or bilateral arrangements were negotiated such as those currently enjoyed by Switzerland in relation to establishing a branch operation by insurers. If such reciprocal arrangements were not agreed then in order to continue trading in the EU insurers and brokers would have to establish authorised subsidiaries in an EU member state and obtain regulatory approval.
Other insurance regulation
The main focus of the regulation of insurance business in the UK is on the solvency of insurance companies and the integrity and competence of their senior management and controllers.
The EU Solvency II Directive, which involved a wide-ranging reform of the EU insurance solvency regime was implemented in January 2016 so is now part of UK law. Another major piece of EU legislation affecting the insurance sector is the Insurance Distribution Directive (IDD). IDD came into force on 22 February 2016 and member states have two years in which to transpose it into national law. Although the Brexit referendum date is set to take place before implementation of IDD by member states in 2018, an actual exit would likely take place later than the deadline for implementation of IDD into national law.
In the event of Brexit, the UK would no longer have to comply with Solvency II; however the FCA and PRA have already implemented Solvency II requirements and UK regulators have been involved with and influential upon the design of the Directive, so it is likely a similarly high standard of regulation would continue in the UK. This is particularly the case as the UK would wish to be granted regulatory equivalence so that UK authorised insurers could benefit from the advantages under Solvency II that this brings to third-country insurers.
Impact of EU law on new lines of business
An example of the effect which EU legislation can have on new lines of business is the EU-wide changes which are to be brought about by the EU General Data Protection Regulation (GDPR) and the EU Network and Information Security Directive (NISD). The GDPR applies from 25 May 2018 and the NISD is also expected to be implemented within about 2 years. These pieces of legislation respectively require the mandatory reporting of personal data breaches and cyber security incidents for certain industries. Both of these developments are likely to increase the uptake of cyber policies, and will also provide better data to enable more accurate pricing of cyber risks.
In the event of Brexit would the UK still mandate this this level of reporting which indirectly benefits the cyber insurance market? Possibly not if the UK decided that the regimes were too burdensome.
In certain areas such as health and safety and environmental reforms EU regulation benefits liability insurers by helping to improve risk management, which in turn reduces the frequency or severity of claims. For example, much UK environmental law depends on EU regulations which are currently directly effective.
Policy wordings and claims issues
Insurance contract law principles
Insurance contract law in England is not governed by EU law, but has been shaped by UK derived law, such as the Marine Insurance Act 1906, the Insurance Act 2015 (coming into force 12 August 2016) and the Consumer Insurance (Disclosure and Representations) Act 2012, so no changes to these regimes would be expected in the event of Brexit.
Regulatory impact on policy wordings
If passporting arrangements were no longer available a new regulatory regime would likely have an impact on policy provisions and wordings such as it does currently where risks are covered outside the EU. This could create an extra element of risk and complexity for multi-national programmes as there may have to be additional non-UK insurers for risks located outside the UK.
Governing law and jurisdiction
If Brexit happens, underwriters and brokers will have to take care over the choice of governing law and jurisdiction clauses they use in policy wordings, particularly the jurisdiction aspect.
Currently, the Rome I and Rome II Regulations apply to the governing law rules in English law for contractual and non-contractual obligations respectively. In the event of Brexit, if England reverted to the position before the Regulations came into force, the position on contractual obligations would remain the same because the UK is a signatory to the Rome Convention.
The regime for non-contractual obligations would not give the parties an express right to choose the law governing their relationship (under the Private International law (Miscellaneous Provisions) Act 1995), but the courts of other EU member states would continue to apply the rules set out in Rome I and II, so a choice of English law would be upheld.
More radical is the effect on jurisdiction rules. Currently in English law, under the Recast Brussels Regulation, the general rule is that the courts where the defendant is domiciled have jurisdiction, except where the parties have agreed otherwise and subject to certain other special jurisdiction provisions, such as for torts.
However, there is an insurance exception to the general rule which only affects the insurer/insured relationship (not insurer to insurer or reinsured to reinsurer) which means that the insured has the option of bringing proceedings in his own domicile, and the insurer is restricted to suing the insured in the insured's country of domicile. The ability to circumvent the rules by a jurisdiction agreement is very limited as the rules are there to protect the customer who is seen to be in a weaker position.
In the event of Brexit where the Recast Brussels Regulation would no longer apply the English Court would likely uphold express clauses between the parties conferring jurisdiction on the English courts. However, the question of how other EU member states would view such clauses, which would be a matter for the laws of those member states, could give rise to considerable uncertainty. It may be prudent for insurers to follow the provisions in the Recast Brussels Regulation anyway (and write them into the policy) in order to be seen to be treating customers fairly under FCA principles.
Parallel proceedings are proceedings which concern the same subject matter but are commenced in the courts of more than one country, often if one party believes it will obtain a more favourable result in the later country's courts. This can be very expensive and time-consuming to defend.
Under the Recast Brussels Regulation, if parallel proceedings are brought in more than one EU member state, generally the court first seised of the dispute decides the jurisdiction issue; although if an exclusive jurisdiction clause states that a certain member state has jurisdiction, that member state can decide the jurisdiction question even if parallel proceedings have already commenced in a different member state.
A Brexit situation, with no other international agreement in place, means there would be no agreed rules against parallel proceedings and the countries in question would apply their own private international law which would increase complexity and costs. Under English law this would mean that the English courts could take jurisdiction even where the parties had only agreed non-exclusive jurisdiction to the English courts. The English courts would also be able to issue anti-suit injunctions to prevent proceedings begin brought in other EU member states, which the Recast Brussels Regulation currently prevents. In most cases, if English courts were the preference, post-Brexit it would be better for insurance policies to contain an exclusive jurisdiction clause in favour of the courts of England.
Service of proceedings
English court rules do not currently require an application for permission to serve out of the jurisdiction if service is to be effected in the EU, so long as the English courts have jurisdiction under the Recast Brussels Regulation. Post-Brexit an application for permission would be required and it would be best to stipulate in the insurance contract that the EU-based party appoint an agent for service of process in England.
Recognition and enforcement of judgments
The Recast Brussels Regulation provides a simplified mechanism for the recognition and enforcement of judgments of courts in EU member states. Judgments may be recognised and enforced in other member states without the need to follow special procedures, such as obtaining a declaration of enforceability in the courts of the member state in which enforcement is sought, which would involve taking local legal advice.
In the event of Brexit this mechanism would no longer apply to English judgments, making the enforcement procedure more complex, uncertain, lengthy and costly.
If England became known as a country from which it was difficult to enforce judgments, it might influence the preference of choice of court, or encourage an alternative choice of dispute resolution such as arbitration.
If the UK were to leave the EU, in certain ongoing litigation it might be appropriate for insurers to seek early judgment to ensure use of the recognition and enforcement mechanism in the Recast Brussel Regulation, or to settle a case to avoid potential issues.
From the examples above, it becomes clear that from the legal perspective Brexit would cause inevitable delay and cost caused by uncertainty and the need to put alternative agreements in place which could take some time. This would affect regulatory, claims and underwriting areas.