Many of the issues raised by Brexit for the insurance industry are the same as for financial services firms more generally.
Important questions include how UK insurers and reinsurers can best access EEA markets once the UK has withdrawn from the EU. In common with other financial services firms, UK insurers (including UK subsidiaries of groups headquartered outside the EEA) currently benefit from passporting rights set out in the Solvency II Directive (Solvency II). Withdrawal from the EU does not of itself mean that they will no longer be able to do business in EEA States. What it does mean is that they will not be able to carry on insurance activities on an EEA-wide basis as a matter of right (albeit subject to the necessary formalities), flowing from the UK’s membership of the EU.
If, post-Brexit, the Government fails to negotiate terms close to “free access”, UK firms might be forced to move some of their business to Europe. International insurers, whose European operations are headquartered in the UK, may rethink the location of their European hubs.
For UK insurers with policyholders in EEA States, there is a risk is that they will no longer be licensed to deliver services in those countries unless they go through the onerous process of establishing an authorised branch in each country. Not doing this may leave insurers unable to pay out on claims, and EEA policyholders without valid insurance, unless there are “grandfathering” provisions in place for existing contracts.
The loss of passporting rights will be equally relevant to the cross-border activities of insurers and reinsurers coming from the EEA into the UK. It is more difficult to advise EEA firms in this regard because it will depend on the regime that the UK decides to adopt in relation to the recognition of insurers meeting Solvency II rules and what they may do in the UK without submitting themselves or a UK subsidiary to UK regulation.
Given the complex nature of much of the insurance business written in the UK, our market attracts some of the world’s top insurance professionals. An additional concern for the industry post-Brexit is likely to be reconciling the need for high-quality staff with the Government’s policy on immigration controls.
UK regulation of insurers and reinsurers post-Brexit seems likely to follow Solvency II closely. The UK may, however, seek to introduce changes once it is no longer constrained by Solvency II. The argument runs that reducing the burdens imposed on UK-headquartered groups would enable them to become more competitive outside the EU. The Treasury Select Committee inquiry into EU insurance regulation is actively considering the impact of Solvency II on the competitiveness of the UK insurance industry and how the current regime might be improved, including for the benefit of consumers. In practice, however, there are other considerations:
- The UK was behind much of the content of Solvency II and is unlikely to reform the current regime radically. UK insurance companies also underwent massive upheaval to comply with the Directive and, in most cases at least, are unlikely to welcome a significant rewriting of the rules.
- The UK authorities are renowned internationally as regulators and supervisors of the highest standard. Putting that reputation at risk to further the competitiveness of UK groups in overseas markets is unlikely to be in the UK’s long-term interests.
- For the UK to be assessed as “equivalent”, it will undoubtedly need to follow Solvency II closely. The benefits of an equivalence determination under Solvency II are, however, limited. Some UK insurers, at least, would favour a less onerous regulatory regime over equivalence.
Insurance intermediaries who stand to lose passporting rights that they currently hold under the Insurance Mediation Directive will also need to consider how they can continue with their cross-border activities after the UK’s exit.
Despite all of the uncertainty surrounding Brexit, insurance businesses are having to prepare for life outside the EU, while keeping a close eye on the shifting political landscape.
Following recent announcements by the Government, firms have little choice but to plan on the assumption that passporting rights will be lost and that any bespoke deal agreed by the Government will fall short of providing free access to the Single Market. As it can take a year or more to restructure an insurance business, few are prepared to wait and see what the Government’s negotiations might deliver.