The European Commission’s stark warning to the Insurance Industry
The European Commission has issued eight separate Notices about the legal and practical implications of Brexit for the UK, to include a Notice (“the…
The European Commission has issued eight separate Notices about the legal and practical implications of Brexit for the UK, to include a Notice (“the Notice”) on the rules surrounding, and associated with, the field of insurance and reinsurance. Whilst the Notice does not contain any information not already known, it provides a stark warning to the insurance industry about the implications of a ‘no deal’ scenario for the insurance and financial markets, particularly in relation to regulation.
The Notice from Brussels highlights the difficulties currently facing insurers once the UK’s status changes to that of a ‘third country’ at the date of withdrawal from the European Economic Area (“EEA”) (30 March 2019). The Notice assumes the UK’s position in the absence of a ratified withdrawal agreement establishing an alternative date when EU law will apply to the UK, specifically, Solvency II Directive (“Solvency II”) and the Insurance Distribution Directive (“IDD”). The ability to underwrite business within the EEA direct from the UK or through a branch is at the moment achieved by UK regulatory authorisation.
Whilst the insurance industry should be well aware of the potential post Brexit implications for underwritten business or new business within the EEA, the Notice would appear to aim to leave no doubt that the European Commission means business. In the absence of any further clarification from the UK Government as to a special deal on regulatory authorisation then understandably many insurers are pushing forward with their contingency planning for a number of different outcomes.
The UK’s position as a ‘third country’ post Brexit means the loss of the passporting rights originating from Solvency II (in the absence of a special provision within the withdrawal agreement). As it stands home state authorisation will be insufficient to facilitate a continuation of business from the UK to within the EEA. Specifically:-
- UK insurers will no longer be able to underwrite insurance business within the EEA under the umbrella of their current home state authorisation;
- The loss of contract continuity and the inability for UK insurers, writing business within the EEA post Brexit, to service the policies underwritten and put on risk before Brexit but providing cover post Brexit;
- The requirement for insurers/reinsurers, pursuant to Solvency II, to provide disclosure to their policyholders about the impact of Brexit upon their rights under the policy and, in particular, the insurer’s/re-insurer’s loss of EEA authorisation;
- The illegality of insurers attempting to make payment of claims notified before Brexit but continuing beyond Brexit (those claims that remain unsettled);
- There will be a need for UK insurance branches domiciled within the European Union to seek and secure authorisation from the member state’s regulator before continuing to write any further business within that member state. Any such authorisation will apply solely to that member state and not the EEA in its entirety. Should insurers wish to underwrite business in several member states then individual authorisations from those member states will be required;
- Where insurers/reinsurers are domiciled and operate within the EU but have a parent undertaking in the UK, unless the UK implements rules empowering the EEA Regulator with regulatory oversight to apply Solvency II to the whole group (including the UK parent undertaking) to facilitate continuity of operations the EU domiciled operation will be unable to operate, unless the group have a holding company with its head office domiciled within the EEA.
Annual policy renewals post 30 March 2018 will need additional consideration in light of the above and servicing restrictions (in the absence of state member individual authorisation). Time is of the essence, particularly in relation to the disclosure obligations of insurers/reinsurers that now only have a matter of six weeks before annual renewals that will exist post Brexit require attention.
Whilst insurers have been aware of the potential implications for their insurance books of business as a result of Brexit and have been laying down contingency plans, the Notice may come as a harsh reminder.
The urgency for strategic review increases for those renewals, whether annual or longer, after 30 March 2018 as the policies will remain on risk beyond the UK’s Brexit and it becoming a ‘third country’. Quite how continuity of polices will be achieved is yet to be seen. Of course, this assumes the absence of a deal being achieved between the UK Government and the EEA to preserve the status quo. Even with the comfort of a transitional period and deal (not yet agreed), there is no certainty that the position will be clarified and stabilised beyond such transitional period. The one current certainty remains uncertainty.
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