Brexit solutions may not deliver contract continuity as London market lobbies hard for official response

Ensuring insureds have contract continuity in the increasingly likely scenario of a no-deal Brexit is a growing concern, warn London market representatives. They fear that a watertight market solution might not be feasible and are lobbying regulators to come up with an official response.

Ongoing disagreement on the Northern Ireland border and lack of consensus within its government on Brexit has increased fears of a disorderly UK departure from the EU. According to the London Insurance and International Brokers Association (LIIBA), there is now a higher risk that the UK will exit the EU with no deal in March next year.

The association’s chief executive Christopher Croft said the concept of mutual market access looks to be “dead in the water”. “At this advanced stage of the game, it would be foolish to ignore the very real possibility of no deal for the UK,” he said.

This conclusion is typical of market observers following the UK’s recent Brexit whitepaper, which lays out the government’s negotiating position. Much to the disappointment of insurers, the paper does not attempt to deliver mutual market access for services. The EU said mutual market access was a non-starter, given UK Prime Minister Theresa May’s Brexit red lines. Since the whitepaper was published, pro-Brexit groups have flexed their muscles, making any further softening of this position harder.

In the event of no deal, there is a risk that insurers will not be able to pay claims or service certain contracts taken out before Brexit. UK insureds could be left unprotected by cover purchased from insurers based in the EU. Perhaps an even bigger problem given the importance of the London market for EU insureds, European buyers could find they are unable to receive payment from UK-only carriers.

With many London-based insurers preparing to write business from new EU subsidiaries, in the longer term the risk of contract continuity is less of a concern. But in the short term, it is potentially a big problem.

The London market is aware of this issue and last week got an agreement from the UK regulator to seek an official solution with the EU.

Via a meeting held with the London Market Group (LMG) – which represents London’s commercial insurance and broking community – the UK’s Financial Conduct Authority (FCA) agreed to seek talks with its regulatory counterparts in the EU and “encourage an official solution to the issue of contract continuity”.

The LMG is supported by the International Underwriting Association of London (IUA), Lloyd’s of London, the Lloyd’s Market Association and LIIBA.

Although the FCA has previously shown willingness to help tackle the potential problem of contract continuity, LIIBA’s Mr Croft told Commercial Risk Europe that this new agreement is “very welcome”.

He explained that where an insurance policy provides both EU and non-EU coverage, it is not clear how the relevant liability could be transferred to an EU entity that would be licensed to pay claims.

Mr Croft said that individual firms alone may not be able to solve the issue of contract continuity, and an official solution that delivers ongoing ability to service clients is needed.

“We hope the FCA will be able to put this point to [its] counterparts and that the EU27 will recognise that it is in the interests of their citizens that this is sorted out,” he explained to CRE.

Mr Croft said the London market is doing “all it can” to address this issue and find a workable solution. “But there remain so many uncertainties that it is hard to say whether this will prove adequate,” he added.

LIIBA’s CEO explained that Brexit clauses, which tend to involve the creation of a contingent liability for an EU entity, will likely only offer a partial solution.

“Where this is an entity that is only in the process of being set up, it may not be in a position to accept such liability,” explained Mr Croft. “We are working with our members to try and agree a standard clause – based on the useful proposal from IUA – but again it may not be a panacea,” he added.

The IUA’s contract continuity clause would enable risks to be placed with both a UK-domiciled insurer and “contingent” EU-based insurer. The wording means a contingent insurer can step in and fulfil policy obligations if the original carrier is no longer able to provide cover post-Brexit.

The IUA then published a second policy clause to help London market insurers deliver contract continuity for policies written on a subscription basis. It allows interested parties to adapt the original clause’s wording to accommodate risks placed with multiple insurers.

This week, the IUA joined LIIBA in registering disappointment that a comprehensive free trade agreement based on mutual EU and UK market access for insureds now looks “impossible”.

In a stark warning for insurance buyers, the IUA said: “Without such mutual market access, significant capacity restrictions will lead to increased costs, less choice and protection gaps for EU clients.”

The association’s chairman Malcolm Newman said it is “frustrating” that negotiations are “not as well advanced as we need to serve our clients”.

He told the IUA’s annual general meeting that the UK’s break from the EU will affect insurers, brokers and clients in varying ways, but that “none felt as informed as they might expect to be”.

“We sincerely hope that the next few months will lead to successful conclusions to satisfy our market’s needs,” he continued.

The IUA also reported progress on lobbying efforts to address Brexit issues, including contract continuity. Insurance Europe, which represents the insurance industry across Europe and has been in close contact with the IUA, has met with EU negotiators, the association said.

“Insurance Europe has met directly with members of the European Commission’s taskforce responsible for negotiations with the UK, to discuss industry concerns surrounding future supervision arrangements and post-Brexit servicing of existing insurance contracts,” the IUA explained.

Mr Newman also welcomed the UK’s Prudential Regulation Authority’s (PRA) planned approach to authorising EU branches operating in London. Research by the IUA shows that £7.38bn is written in London by EU branch operations.

“Following a number of meetings with officials to discuss the subject, we were pleased to hear the authority declare its intention to maintain a high degree of supervisory cooperation with the EU and that, provided they are not conducting material retail business in the UK, firms can expect to continue operating as branches,” said the IUA.

“This promises to help preserve London’s unique depth of insurance expertise and resource, and suggests a high degree of future supervisory cooperation between the UK and EU,” added its chair Mr Newman.

The IUA raised concerns about a £200m threshold above which firms would have to apply for authorisation as a subsidiary. Subsequently, the PRA issued greater detail on how this metric is calculated, confirmed it would not be rigidly applied and raised the threshold itself to £500m, explained the IUA.

While big London-based insurers such as Lloyd’s, AIG and RSA have been busy setting up subsidiaries in the EU in preparation for Brexit, brokers have been slower to react.

But LIIBA’s half-year report says members must consider how they will continue to service EU clients over the longer term in the event of a no-deal Brexit. It says they will need to create EU subsidiaries to achieve this and encourages them to act now.

The association suggests Brussels, or the Greek cities of Athens and Piraeus, as potential destinations following discussions with local regulators.

“We have been liaising closely with the Belgian government and regulators to assist any member who might consider Brussels as a location for such a subsidiary. These discussions have been very positive. We’ve also had an introductory meeting with officials from the Greek Embassy. This was also positive, and LIIBA will be pursuing a more in-depth exploration of whether Athens or Piraeus could prove a viable alternative location,” LIIBA states in its report.

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