Germany: Brexit – German legislator has created the basis for a transitional period to settle business after a hard Brexit – BaFin may order to extend passporting rights for UK insurers for transitional period

On 21 February 2019, in view of a possible hard Brexit, the German legislator has passed a bill (so-called Brexit-Steuerbegleitgesetz – Brexit-StBG) which also concerns insurance and reinsurance contracts in Germany underwritten by UK risk carriers via FoS or FoE. The new law will come into force on 29 March 2019.

The core of the new regulation is that the German Insurance Supervisory Authority (BaFin) may order that for a transitional period of no more than 21 months (beginning from Brexit) only for the purposes of settlement of insurance contracts the provisions governing passporting into Germany apply accordingly to those UK-insurers which have been conducting insurance business in Germany (either on FoS or FoE basis) at date of Brexit. This shall only apply in the event of a hard Brexit (without any agreement within the meaning of Article 50 para. 2 sentence 2 Treaty on European Union).

The reasons for this is that from a civil law perspective, as a general rule, insurance contracts are effective even if they have been entered into in violation of insurance supervisory law. As a result, the effectiveness of the insurance contracts entered into in accordance with the current supervisory law will not be affected by Brexit.

For this purpose German legislator will now insert a new sect. 66a into the German Insurance Supervisory Act (“Versicherungsaufsichtsgesetz”, VAG). The new measures are part of a wider set of legislation concerning primarily tax matters. The legislative initiative was started with the draft bill of 4 January 2019 (BR-Ds. 4/19 = BT-Ds. 19/7377 of 28 January 2019). After several changes, the new bill has been passed on the basis of the Recommendations and Report of the Financial Committee of 20 February 2019 (BT-Ds. 19/7959). There have been, however, no changes in the legislative procedure with regard to sect. 66a VAG.

German legislator explains that it expects UK insurers to (a) cancel and to fully “settle” the insurance contracts within this period, or if this is not possible to (b) continue the contracts by either obtaining a German license to conduct insurance business via a branch in Germany until the extension period has expired or by obtaining the necessary approval for a transfer of portfolio to an insurance undertaking which has a German or EU/EEA license (see the preamble to the new sect. 66a VAG, BR-Ds. 4/19 of 4 January). Thus, the transitional period is intended to be a settlement period – UK insurers will not be allowed to actively underwrite any new risk.

The intended provisions shall apply to insurance and reinsurance, including Lloyd’s business.

The German bill, however, does not contain any special provisions for insurance intermediaries. At present, there is no publicly known legislative attempt to make comparable special provisions for insurance intermediaries as well.

As a consequence, even if UK insurers are allowed to settle already existing insurance contracts within the 21 month-period, they will probably be obliged to use their own employees for the administration and settlement of these contracts or can be asked to cooperate with insurance intermediaries properly licensed and authorized in Germany to do so. They will probably be not allowed to continue to cooperate with UK insurance intermediaries who after Brexit will no longer be allowed to rely on FoE/FoS.

In the course of the legislative procedure, it had been suggested to extend the transitional period or to leave the duration of the extension to the discretion of BaFin (even beyond 21 months), but these proposals were rejected. Legislator considers the 21 month-period to be sufficient.

BaFin has not issued any statement with regard to the extension of the passporting rights for UK risk carriers yet. It is thus unclear whether BaFin will make use of the full 21 months after Brexit.