Transition deal will help solve Brexit insurance issues

Last week’s Brexit transition agreement will give firms and regulators time to resolve the Brexit concerns of insurance buyers. But it also gives some renewed hope that a trade deal could eventually be reached on wholesale insurance. Following backing for a transition deal by the European Council on Friday, the Bank of England (BoE) reassured insurers and banks that it should be business as usual during the Brexit transition period. The announcement was welcomed by the insurance industry, which is concerned about the effect of Brexit on existing insurance contracts when the UK leaves the EU in exactly one year’s time. On Thursday, the BoE said it is reasonable for firms currently carrying on regulated activities in the UK by means of passporting rights to assume they will be able to continue undertaking these activities during the transition period in much the same way as now. It also said the government will create a backstop – a temporary permission regime – that would allow international insurers in the UK to continue their activities after withdrawal, even if the Withdrawal Agreement is not ratified. Separately, the Financial Conduct Authority (FCA) said the transitional arrangement provides an opportunity for EU and UK regulators to collaborate and enact solutions to issues, such as the ability of insurers to pay claims and accept premiums for cross-border risks after the UK leaves the EU in March next year. Andrew Bailey, chief executive of the FCA, said on Wednesday: “The best mitigation of those risks would be an agreement between the UK and the EU on the treatment of existing contracts, which would enable firms to perform regulated activities and be confident that the regulatory regime would be supportive. The objective of such a solution would be to support financial stability and to support consumers and users of financial services in the UK and EU.” However, Mr Bailey recognised that a formal agreement and adoption of a transition period depends on “everything” being agreed in October. He also welcomed the government’s commitment to a backup plan of temporary permission for EU insurers to operate in the UK, but said that regulators will use the transition period to good effect and find practical solutions. The transition agreement gives insurers more time to execute their Brexit strategies, but it does not mean they can pull back from such plans. Lloyd’s and London market insurers are expected to continue to establish EU subsidiaries to ensure market access after 29 March 2019. "Insurers effectively now have until the end of 2020 to get their Brexit plans in place. However, insurers that currently passport from the UK into EU27 states still need to press ahead with their contingency plans, allowing for the risk that there is a hard Brexit with no transitional period,” according to Mathew Rutter, insurance advisory partner at international law firm DAC Beachcroft. “The PRA has now confirmed that incoming insurers at least have the backstop of a temporary permissions regime, so they have a bit more certainty. However, in terms of practical advice, for example as to what to tell policyholders, the FCA has been less than helpful,” said Mr Rutter. “Insurers should be thinking about Brexit clauses – or at least providing some explanation to brokers and policyholders about areas where cover may be uncertain as a result of Brexit,” he told CRE. Insurers did welcome the transition arrangement and are urging regulators will use the time to sort out unresolved issues, such as contract continuity and give clarity on future trade arrangements. “The announcement provides companies within the London insurance market with some reassurances about the landscape after we leave the EU and while we recognise there are still issues to resolve, we are pleased that both sides have made further progress,” said Chris Beazley, chief executive officer of the London Market Group. Echoing the comments of the FCA’s CEO this week, the LMG has mapped out how regulators could work together to make this agreement a reality. It wants to see a transition period that ensures continuity of trading between the UK. “It is vital that our clients in both the EU and UK are able to maintain their access to a broad range of insurance services, expertise and capacity,” Mr Beazley said. One of the key concerns for buyers and insurers is the continuation of cross-border insurance policies in-force and on-risk after March 2019. In the absence of a robust agreement, from March 2019, UK insurers will no longer be authorised to carry out insurance activities with regard to these cross-border insurance contracts in the EU27, which includes fulfilling insurance contracts and paying insurance claims benefits to policyholders and beneficiaries. In February, the European Insurance and Occupational Pensions Authority called on UK insurers and insurance supervisory authorities to ensure continuity of service to policyholders and beneficiaries of cross-border insurance contracts after the UK’s withdrawal from the EU. Many UK-based insurers, but not all, are creating EU subsidiaries and looking to legally transfer policies to legal entities in the EU, to ensure continuity of contracts. “It is critical that the market is able to honour existing contracts and to support EU businesses in resolving their claims. Ideally this will entail an agreement that any business entered into prior to 29 March 2019, will remain valid, regardless of whether a new trade deal is agreed,” said Mr Beazley. “The willingness to support EU businesses is underlined by the UK government, which has indicated that it will bring forward legislation if necessary to ensure that contractual obligations by EU insurance firms in the UK can be met for a limited period following the UK’s withdrawal from the EU,” he said. The hope is that the transition agreement reached last week will now lead to “meaningful negotiations” regarding a future mutually beneficial trading relationship that is in the best interests of EU and UK consumers and businesses, said Mr Beazley. This view is shared by the regulator. In his comments this week, Mr Bailey seemed optimistic about trade negotiations for wholesale financial markets. “I am encouraged that I see progress in establishing an understanding that it is possible to have a free trade agreement that encompasses financial services,” he said. On 7 March, the UK Chancellor Philip Hammond argued that it is possible to reach a deal on financial services. He said that was in the "mutual interest" of both the UK and the EU to include financial services in a free trade agreement. The LMG, the main group representing London’s insurance market on Brexit, is calling for a deal that achieves mutual market access for financial services. This is particularly critical for commercial insurance, which ensures that risks are effectively pooled across UK and EU markets and it is absolutely in our clients’ interests to achieve this, Mr Beazley told CRE. “Our proposals look to achieve a level playing field and full regulatory cooperation. This would mean that neither the EU nor the UK would have to sacrifice market access or control over their respective regulatory regimes. Agreements, such as the Covered Agreement for Reinsurance that the EU has already agreed with the US, are a good basis upon which to build as the negotiations develop,” he said. The LMG’s Brexit Taskforce proposal calls for a Free Trade Agreement that would permit mutual market access and recognition of both the EU and UK’s prudential regimes, with a Solvency II equivalence outcome built into it. It would also include a recommended framework for supervisory cooperation, which would align regulatory oversight of (re)insurers and brokers/intermediaries in both the EU and UK. The agreement proposes a ‘prudential carve-out’ and is not a new concept to the EU. “Our proposals recognise that the UK and EU have worked together productively to build a common supervisory culture for the industry, which has seen member state and EU regulators cooperating closely and regularly exchanging supervisory information,” said Mr Beazley. “These kinds of regulatory practices are growing in global influence, with many third countries now exploring how they can align their systems to these standards and grow cross-border trade with the EU,” he said.

Transition deal will help solve Brexit insurance issues

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