Insurers and intermediaries throughout the EEA (including those owned by groups outside) benefit from the European insurance single market under which a firm authorised in one EEA state (home state) may carry on a cross-border basis throughout the EEA by way of establishment through a branch operation or by way of cross-border services (passporting).
There are two key drivers arising out of Brexit for UK Insurance firms to consider re-locating in the EU:
- Loss of Passporting Rights; and
- Loss of Mutual recognition under the EU Cross-Border Mergers Directive.
1. Loss of Passporting Rights
Following Brexit, UK insurance firms are likely to lose their passporting rights with the following results:
- UK firms with branches in EEA countries will need to either obtain local authorisation for the branch or establish a subsidiary in the EEA (with its own regulatory capital) in order to write EEA business on a passporting basis;
- UK Firms that currently write insurance business in an EEA country from the UK on a cross-border basis will likely need to establish a locally authorised subsidiary or branch to continue writing business on a cross-border passporting basis within the EEA; and
- EEA based insurers that write insurance business in the UK on a cross-border basis will need to obtain UK authorisation for UK branches or will need to set up a UK subsidiary with its own regulatory capital.
2. Cross-Border Transfers of Business
Assuming that UK firms lose passporting rights, then it is likely that the UK will lose the automatic mutual recognition of insurance business transfers sanctioned by UK or EEA courts or regulators thereby making the process of re-organising books of business located in insurance companies and their branches in the UK and the EEA much more complex.
Brexit is likely to trigger the loss of automatic mutual recognition of insurance business transfers sanctioned by the UK or EEA courts or regulators, which is likely to entail the loss of the benefits of the EU Cross Border Merger Directive regime for transfers of assets and associated UK Court sanctioned schemes of arrangement involving the transfer of liabilities.
Both the UK and Ireland have implemented the EU Cross Border Merger Directive.
Pre Brexit UK firms will need to consider availing of the EU Cross Border Merger Directive Regime for proposed mergers and divisions of insurance business between UK insurance business and existing EEA business to be relocated in e.g. Ireland.
3. European Framework for Financial Supervision EFSF
Following Brexit, Ireland will continue to be member of the EU and will continue to be subject to the operation of the EFSF, which in the case of Insurance Business will continue to operate under the auspices of EIOPA the EU Supervisory Authority for Insurance.
Notwithstanding the rule making powers of EIOPA, insurance in the EU will continue to be a national competence (unlike banking in the Eurozone). For the Central Bank in Ireland to operate Memoranda of Understanding with the Prudential Regulation Authority in the UK.
4. Solvency II Implications for EEA Branches of UK Firms
For regulatory reporting purposes, it is likely that the UK will maintain a Solvency II based system of prudential regulation and that the UK system is likely to be assessed by the EU as an equivalent jurisdiction under Solvency II.
5. Authorisation of Insurance Business in Ireland
The establishment of (re) insurance businesses in Ireland is regulated under the EU (Insurance and Reinsurance) Regulations 2015, which adopts Solvency II in Ireland.
The application process is well set out on the Central Bank Website and in high level terms covers the following considerations:
5.1 Approval of Applicant
The initial application is made by way of proposed Business Plan and Programme of Operations
The Central Bank is required to be satisfied as to the applicant, its parent and the operation of the wider group (that it is owned by one or more financial institutions or by a wide spread of owners) and the applicant will be required to demonstrate that it has consulted with it home regulator in connection with the proposed application and if the applicant is subject to the Financial Conglomerates Directive the arrangements for supervision will need to be set out.
Qualifying shareholdings in the applicant are also subject to direct approval including matters as to suitability and a willingness and capacity to support the business of the firm.
The Central Bank will also require the firm to be established as a legal entity under Irish law.
5.2 Business Plan
The Business Plan will need to set out the classes of insurance to be written as well as details of the business and products and the target financial objectives for the firm.
Key Functions with the applicant will need to set out details of senior management, systems and controls within the firm with appropriate segregation of responsibilities in relation to each of the key functions such as between Financial Control, Underwriting, Sales, Reserving, Claims Administration, Actuarial and Internal Audit.
The Business Plan will require clear delineation of responsibilities for each key function and clear and segregated reporting lines to ensure effective financial supervision and risk management of the proposed business of the firm.
An area of themed priority inspection of insurance firms in Ireland over the last few years has focussed on weaknesses and failures of internal governance, such as occurred in relation to the operations of RSA Ireland.
5.3 Capital and Financial Projections
The applicant will need to provide information on its minimum own funds to manage the proposed insurance business of the firm at the outset and a three year projection of and profit and loss estimates of the business, including details of its projected future solvency capital requirement and details of financial resources to cover technical provisions, the MCR and SCR as well as management expenses and premiums and claims.
5.4 Acceptance of Existing Internal Models
Based on recent comments of Sylvia Cronin, it is likely in the case of newly incorporated subsidiaries of UK insurance firms that are looking to relocate EEA business into Ireland that at the outset the Central Bank will, as an interim measure, accept existing internal models operated by such firms on the basis that the Central Bank will already, through its participation in supervisory colleges for UK insurance firms that are carrying on business in the EEA of the risk methodologies operated by such firms to enable the Central Bank to be comfortable to accept existing models as an interim measure in the approval process.
Outsourcing is permitted, including for critical or important functions, provided that the outsourcing arrangement does not material increase the management of the firms risk.
Outsourcing is only permitted on the basis that the firm retains responsibility at all times of the outsourced activities and the Central Bank will be required to be satisfied as to the proposed arrangements, including ability of the firm to supervise the outsourced activity along with the ability of each of the Internal Auditor, the External Auditor and authorised officers of the Central Bank to inspect the operation of the outsourced functions.
Any planned outsourcing will need to be included in the Business Plan including details of the proposed outsourced activities, the resources of the proposed service provider, and the ability of the firm to supervise the outsourced activities. Also copies of the proposed outsourcing agreements will need to include service level agreements and inspection powers.