The BREXIT impact on insurers – Are Part VII transfers the solution?
To say the UK decision to leave the European Union (“EU”) has created a degree of uncertainty, and a high degree of risk and cost to UK businesses, is an understatement of the enormous challenges which the decision has created for both the insurance and banking sectors
What are the challenges and the impact of the loss of passporting rights?
For insurers, the likely loss of “passporting rights” for cross-border contracts poses a significant challenge for business continuity and regulatory compliance post-Brexit.
Much business has been written by UK and EU insurers using “passporting rights” under EU legislation to allow cross-border contracts to be written without the insurer needing to have an authorised subsidiary or branch in the particular European Economic Area (“EEA”) in which the policyholder is situated.
If passporting rights are lost, the risk is that UK insurers may not have the authorisation needed to perform their obligations under contracts held by policyholder living in an EEA state (and vice versa for EEA insurers with UK policyholders).
The European Insurance and Occupational Pensions Authority (“EIOPA”) has, therefore, advised insurers to take mitigating action.
The key question for
- EEA insurers with UK policyholders /risks and
- UK insurers with EEA policyholders /risks
is whether they can continue to write and administer such business post-Brexit?
- In December 2017, the UK government confirmed that contract continuity would be safeguarded for EEA insurers writing business in the UK by proposing to introduce a "temporary permissions" regime to enable EEA insurers to continue their activities in the UK for a limited period after withdrawal. In addition, it proposed to ensure that contractual obligations, such as insurance contracts not covered by this temporary regime, could continue to be met. Whilst the precise scope has yet to be clarified, it is a welcome and eminently sensible proposal to mitigate some of the potential risks and additional costs caused by Brexit.
- Sadly for UK insurers, no such olive branch or practical concession has been offered by the EU despite the fact that this would clearly be in the best interests of affected EEA policyholders.
A question also arises as to whether the loss of passporting rights would be judged to be an issue only against contracts originally written cross-border into the EEA as opposed to those where the policyholders have subsequently moved from the UK into an EEA jurisdiction.
What are the solutions for UK insurers with EEA policyholders or risks?
It is possible post-Brexit in the above circumstances that UK insurers will not be able to pay claims or to fulfil other contractual obligations under pre-existing cross-border policies, despite the fact that those policies will continue to be valid as a matter of contract. Further complexities arise here, however, regarding local law and whether authorisation is needed to pay claims into a particular jurisdiction.
Hence, the situation is not straightforward and will vary from insurer to insurer depending on their business and the mix of EEA jurisdictions where they have written business.
Other mitigating actions available to firms include establishing an authorised EEA subsidiary to act as a central operations hub for their EEA business. This may not provide a satisfactory solution, however, in view of the significant time and cost and capital inefficiencies which may arise. It is also unduly burdensome for insurers who are not writing new business outside the UK and have no intention of doing so post-Brexit. In addition, policyholders will lose their rights under the UK’s Financial Services Compensation Scheme (“FSCS”) and be subject to any local EEA scheme which may be different and will require assessing as to whether it is better or worse than the UK scheme.
Another solution would be for the UK insurer to obtain authorisation for a branch in the relevant EEA jurisdiction(s). The significant disadvantage of this approach, however, is that a third country branch (including an EEA branch of a UK insurer post-Brexit) has no passporting rights. Hence, separately authorised branches would be needed in every jurisdiction where the insurer has policyholders making this impractical and costly for any insurer with more widespread EEA based policyholders.
A third solution offered by EIOPA is for the UK insurer to transfer the relevant policies to an EEA insurer, under a Part VII transfer. This is a challenging process and would require a suitably authorised EEA transferee company to be found or established. As a wider backdrop to this possible solution, concern has already been expressed about the UK regulators and court’s capacity to deal with all of the Part VII transfers given the potential scale of this issue and the constraints imposed by the Brexit deadlines.
What are insurers doing to address the problem?
The answer is several different approaches, depending on the particular circumstances of each company.
- “SE” companies – some insurers (eg Chubb) have turned their UK-based companies into an Societas Europaea company (“SE”) which is a type of public limited-liability company regulated under EU law which can be easily moved between EU member states and is suitable for companies with ongoing business across multiple EEA jurisdictions.
- Part VII transfer – some larger companies with a spread of EEA business have already undertaken Part VII transfers (eg Admiral, Hiscox, and RSA as well as Lloyds of London) in which EEA policyholders are moved to a new or existing subsidiary elsewhere in the EEA.
- Wait and see – in view of the varied challenges and costs, a large number of companies are waiting to see if a political solution is reached, particularly those with no intention of selling contracts into the EEA post-Brexit and who do not want to have the expense and overhead of setting up an EEA subsidiary or branch(es). This includes a number of smaller life assurers with a spread of policyholders resident in the EEA but who are not actively selling into those jurisdictions.
Is a Part VII transfer the optimal solution?
There is no doubt that the Part VII transfer legislation is a very powerful and tried and tested tool for obtaining legal certainty to many insurance business transfer challenges. It is certainly not without its many complexities, challenges and costs but many of these can be substantially mitigated by in-depth expertise and high quality planning by experienced practitioners.
Companies need to carefully review their own particular business model and contract portfolio as well as the developing Brexit position and legislation in order to determine if a Part VII transfer solution is the best solution for them.
A Part VII transfer under the Financial Services and Markets Act 2000 (“FSMA 2000”) is certainly a feasible solution but whether it is the optimal solution will depend on a number of factors. Given the significant risks posed to UK insurers, we have already helped clients understand the wider considerations by undertaking feasibility studies in order to provide a sound basis for the way forward.
To conclude :- Part VII transfers and Brexit…… a pain or a panacea?
As with house buying where “location, location, location” is the mantra of a successful house purchase, “precision, precision, precision” should be the mantra of the Part VII expert to take the pain out of the transfer process and provide the ultimate Brexit panacea for beleagured UK insurers……
Director & Part VII specialist
30 Jan 2019