Three months have already passed since the UK referendum on leaving the European Union and the debates and in-depth analysis on the potential impact on the Insurance Market are still open; the three months has not produced much clarity.
It goes without saying that currently London is the largest global hub for commercial and speciality risk and part of such a success has been due to being part of the EU. Now, in the short term, the ramifications of the vote to leave will probably change the map of the global insurance business and will create a level of uncertainty which has been rarely experienced.
Apart from the latest news of the immediate cut of almost 3,000 employees in Lloyd’s market and further catastrophic scenarios, we will try to focus our attention to some of the main issues raised as a result of the referendum: (a) with regards to the UK insurers operating in Italy and (b) with regards to Italian Insurers operating in the UK.
Loss of Mutual Recognition or Passporting
The EU Single Market granted International Insurers access to the EU market on London’s doorstep and, at the same time, allowed UK based insurers to be able to write insurance and reinsurance in the other 27 Members States both on a cross-border basis or directly in those countries in which they had branches.
The passport system allowed UK Insurers to establish branches in other Member States as well as Italian Insurers to open branches in UK under the so called “Home Country Control” system, meaning that the Home Country Supervisor had the exclusive responsibility for any regulatory and prudential supervision of the Insurer within the EU.
Such a passport system allowed both UK and Italian insurers through the Italian and London hub to service their clients/assured globally.
As a consequence of Brexit, and based on the current regulation, UK insurers and intermediaries will have to consider establishing or using EU subsidiaries and/or obtain new authorizations in order to offer cross-border services to EU clients. In this perspective to UK Insurers will apply Articles 28 and 29 of the Italian Insurance Code (“IIC”) and they will need to obtain new authorization in order to carry out business under the right of establishment, according to the prohibition to carry on business under the freedom of services.
The same issue will affect the business of Italian based/authorized insurers who will be entitled to carry on business in UK on a cross-border basis only through local subsidiaries and/or through new authorizations.
Furthermore, from a regulatory point of view, the Home Country Control System will not operate and branches will be subject to the prudential and regulatory control by the Supervisory Authority in the hosting country.
The EU (and Italy) is facing something which has never been experienced before.
A quite clear set of regulations has been developed in the EU over the last decades in order to properly regulate the insurance business by Member States Insurers or Third State Insurers within and outside the EU.
However, it is hard to say that Brexit will not have any impact on the current law because there is still in place a clear set of rules for Third State Insurers and UK could be simply considered a Third State, hence the relevant rules governing the activity of Third States’ Insurers will apply.
But, in our view, it is unlikely that EU and UK will not negotiate a treaty in order to regulate the largest global insurance hub. We assume that a sector of such importance will be the core of the discussion between EU and UK as a consequence of the formal request to leave the EU. We can expect a period of uncertainty about the legal basis for insurance regulation and responsibility of institution/supervision and at the moment it is next to impossible to make predictions.
The UK government will have to commence a focussed negotiation with the EU Commission for the withdrawal agreement, which will have also to include a number of transitional measures regarding budgetary, legal, political and finance rules. Those transitional measures will obviously increase the level of uncertainty of the legal applicable framework. This is something really new and with unpredictable points on the outcome and the timeframe.
The change of the current legal regime will affect the terms and effects of the contracts and transactions.
Due to the strong connections between trade and insurances, we assume that a review of standard documentation in trade will probably have an impact also on the surrounding insurance products and policy wording (including the consequences related to the application of a different tax regime).
Moreover policyholders’ residency will become an issue and policies terms could need reviews. Indeed, the administration of long term contracts involving insureds, risks and policyholders outside UK could became difficult as a consequence of the abandon of the passport system.
International Trade and New Barriers
A further key aspect of the business of UK insurers and intermediaries which may be affected by UK being outside the European Union could also be that UK will not longer be entitled to benefit from treaties between EU and third states, so that insurers and intermediaries based in UK could face new barriers when providing service to third countries until the EU treaties would be replaced by UK treaties.
Furthermore, UK will need also to implement new regulations and treaties (also with the EU) in order to regulate the data protection schemes (and grant the data flow into the UK from EU), the enforcement of judgments, employees rights and obligations (on both sides the UK citizens employed in EU and EU citizen employed in UK) and, more in general, professionals providing ACROSS THE EUNIVERSE 15 their service on the mutual recognition scheme within the EU.
This will take a long time and, on a very preliminary standpoint, it could lead to further risks and areas of uncertainties in the insurance business. These issues could also push insurers and intermediaries to identify possible alternatives to continue to write business on a cross-border basis and maintaining the EU passport system.
The UK’s decision to leave the EU will have important effects in tax field.
In particular, the exit of the UK from EU would have as a principle consequence the nonapplication of the EU Directives. The most relevant Directives not more applicable would be: parent-subsidiary Directive (dir. 90/435/CEE), interests and royalties Directive (dir. 2003/49/CE), merger Directive (dir. 90/434/CEE) and administrative cooperation in the field of taxation Directive (dir. 2011/16/UE). The matters listed above, in absence of different and specific agreement with EU Countries, would be governed by Double Tax Treaties (“DTT”), which involve, generally, a tax regime less advantageous.
As to concern indirect taxation, particularly Value Added Tax (“VAT”), after Brexit, the UK would no longer be required to apply the VAT Directives and Regulations. This means that the sale of goods between the UK and the EU would no longer be considered as intra-EU transactions but as import/export, with the consequence application of VAT.
Change of EU Insurance Market Scenario
Being the largest Insurance Hub in Europe, the UK has always had a “greater voice at the trade table being part of the EU, being part of a larger economic entity” and has been highly influential in the development of EU rules for Insurance business.
As a consequence of Brexit, we can expect that there will be a reshuffling of influence within EU decision making rooms. In this scenario, according to the long-lasting experience and success of insurance business, we hope that Italy will be able to increase its level of influence in the development of the common rules within the EU.
Furthermore, there could be also the possibility that a new insurance hub will need to be considered within the EU Market in order to accept the international insurers and intermediaries moving from London.
With particular reference to the business of intermediaries, UK entities could be forced to move to an EU member state in order not to loose the benefit of passporting; leaving the EU market and remaining in UK (in the absence of an agreement) would force those intermediary to rebuild completely their distribution networks.
In a recent interview published on an English newspaper, John Nelson (the head of Lloyd’s) says that “The UK's position at the centre of the global insurance market is under threat after the famous Lloyd's of London market said it may be forced to move some of its business to continental Europe as a result of the Brexit vote” because “There will be bits of business where it will be better for us and more efficient for us, if we don't get single market access if we write it in the EU” (http://www.independent.co.uk/news/business/news/brexit-will-make-insurancefirms-quit-uk-says-lloyds-of-london-boss-a7225941.html).
It is clear that we are not in the position to predict whether this is really what is going to happen or whether this is simple positioning before the negotiations: however, what is clear is that we will need to keep on our toes to capture the opportunities that are likely to occur.