In this bulletin, we summarise some of the issues the insurance industry now faces following the referendum result.
Hogan Lovells has had in place a dedicated constitutional change taskforce led by senior thought leaders from across our business since 2014 to analyse and alert businesses to the issues on the horizon. We also have a wellestablished and highly experienced insurance practice across Europe and the rest of the world.
• A period of uncertainty
The UK faces the prospect of renegotiating its trading arrangements not just with the European Union (the "EU") but also with the rest of the world. This is not going to be a swift process and whilst there are different models that might apply to the UK (eg the Norwegian model or the Swiss model), we cannot say for certain what arrangements will be put in place. For most insurance businesses, it will be a case of considering contingency plans and watching developments almost day by day until the future becomes clearer. A long period of uncertainty would clearly be challenging for businesses but equally the UK may not be in a position to kick off negotiations quickly.
• What might we expect?
Under the Norwegian model, the UK would be a member of the European Economic Area (the "EEA") and would be bound by EU legislation. The Swiss model means being outside the EEA but becoming an equivalent jurisdiction for regulatory purposes. The UK would need to maintain a regulatory regime similar to the EU's regime but there may be some flexibility to streamline our system. In both models, the UK would probably have little or no influence over future regulatory developments. If the UK and European regulatory regimes diverged over time, the UK may find itself in the difficult position of having to follow EEA policy or risk the loss of its "equivalence" status, even though that policy is developed without the same level of influence from the UK insurance industry that has previously applied. The development of the "matching adjustment" rules in Solvency II is a particular example of the importance of that influence.
• Access to the European insurance market
Access to the European insurance market will be a key concern for UK insurers, starting with the right to passport into other countries in the EEA. Whether the right to passport will be retained must be in doubt if British politicians feel obliged to negotiate an exclusion from the general principle of freedom of movement.
• Restructuring options if the European passport is withdrawn
If the right to passport is withdrawn, UK insurers with European businesses will almost certainly need to restructure their businesses. They could potentially seek permission to conduct insurance business in each EEA state in which they operate, without using the passport. Alternatively, they could operate through an EEA based company. The new EEA based company would need permission to conduct insurance business in the relevant EEA country. The new company could be a Societas Europaea, with the flexibility to relocate its head office to different European states in the future.
UK insurers may want to consider restructuring so that their UK business is a branch of a new EEA company. This is likely to be a more efficient structure from a regulatory capital perspective than operating with separate UK and EEA companies and could be achieved in several different ways (for example under Part VII of the Financial Services and Markets Act 2000 or a merger to create a Societas Europaea). The UK branch might continue to hold much of the business infrastructure for the EEA company.
• Issues for European insurers operating in the UK
European insurers wanting to operate in the UK will potentially face similar problems in terms of needing permission to conduct insurance business in the UK if the right to passport is withdrawn and having to hold more capital.
We expect Lloyd's of London, which provides an excellent point of access to reinsurance risk worldwide through its over 80 permissions to conduct insurance business worldwide, to continue to be a significant force in the insurance market. It too will however need to consider restructuring its European operations.
• The UK as a leading insurance centre
More difficult to assess is the impact on the UK as a leading insurance centre. Switzerland has maintained a strong business community from outside the EU with a number of major international insurers headquartered there (eg Zurich and Swiss Re). But the likelihood is that competition for the UK as a major insurance centre will emerge from other locations.
• Is there a lobbying opportunity?
We think that the opportunity for UK insurers to lobby for change to existing insurance regulation will be limited in the short term. The UK government's focus will be on securing the best deal for the country as a whole in what will be a highly complex negotiation.
UK insurance regulation has in many respects been "ahead of the curve" for some time, so it is unlikely that UK regulators would support wholesale change. But depending on where we end up (and this might be where the UK insurance industry should focus any lobbying efforts), with the Norwegian model, the Swiss model or something else, it might be possible to streamline UK regulation in the future.
• Existing law continues to apply for now
As the UK insurance regulators have already pointed out, UK insurers will be required to abide by their obligations under UK law, including those derived from EU law, until such time as the law is changed.