Lloyd’s has recently confirmed in a press release that it would pay all valid claims if the proposed transitional period, or a similar arrangement, is not agreed between the UK and the EU, such that there is a “hard Brexit". However, the press release poses more questions than it answers.
The press release refers, almost in passing, to a Part VII transfer which Lloyd’s is undertaking in order to transfer all EEA business to Lloyd’s Brussels. The target date for completion of this Part VII transfer is the end of 2020, and Lloyd’s has billed its announcement that it will pay all valid claims in event of a hard Brexit as a stop-gap for the period between Brexit and completion of the Part VII transfer.
There are two potential issues with this:
- If there is a hard Brexit, it may not be possible to complete Lloyd’s Part VII, as the legal mechanism for completing a cross-border Part VII may simply fall away. This may be an issue even if a transitional period is agreed, and the terms of the withdrawal agreement would need to be checked carefully.
- Lloyd’s will lose its passporting rights following Brexit. If a transitional period is not agreed (or if an equivalent to passporting rights is not agreed as part of the withdrawal agreement), a Lloyd’s managing agent which pays a claim to, for example, a German policyholder could be doing so in breach of German law. Lloyd’s has clearly anticipated this, as its press release states that it “expects that [Lloyd’s commitment to pay claims] will have the support of all European regulators as it goes to the heart of treating customers fairly." This seems a little optimistic in light of recent papers published by EIOPA, which have taken a hard line on the payment of claims by UK (re)insurers to EEA policyholders.
A final, unspoken, line of Lloyd’s press release lies in its timing: published shortly before the UK and the EU are due to agree a deal or declare a hard Brexit, the issues which a hard Brexit will present, as highlighted by the press release, will hopefully encourage the UK and the EU to do the former.
However, Lloyd’s has sensibly continued to prepare for a hard Brexit. Part of these preparations included confirming recently that Lloyd’s Brussels subsidiary will be ready to write facultative reinsurance and non-proportional treaty reinsurance from 1 January 2019. Lloyd’s is expecting that the UK will secure Solvency II reinsurance equivalence in 2019, enabling Lloyd’s to write the remaining treaty reinsurance business, but has said that in any event it will be ready to process the remaining treaty reinsurance business through Lloyd’s Brussels subsidiary from 1 January 2020.