Insurance market observers unconvinced by draft Brexit agreement

The draft Brexit agreement published yesterday will not preserve passporting rights for UK insurers or address the issue of contract certainty once the transition period runs out, according to insurance industry commentators. A draft withdrawal agreement and political declaration on desired future trade between the EU and UK have been agreed by negotiators on both sides and, last night, the UK Cabinet. However, with the resignation of UK Brexit secretary Dominic Raab and other ministers, doubts are growing about Prime Minister Theresa May’s ability to push the deal through the UK Parliament, potentially increasing the risk of a no-deal Brexit. The withdrawal agreement would be legally binding and covers all elements of the UK's withdrawal from the EU. It covers areas such as citizens' rights, the financial settlement, a transition period, governance, protocols on Ireland, Gibraltar and Cyprus, as well as a range of other separation issues. Negotiators have also agreed an option to extend the transition period, should a future trade deal not be agreed by 31 December 2020. Alternatively, as of January 2021, a backstop solution for Ireland and Northern Ireland would apply, subject to a joint review mechanism. In addition to the withdrawal agreement, the political declaration sets out what a future EU and UK trade deal might look like. It is not binding and details of that relationship would be worked out during the transition period. On financial services, including insurance, the declaration says both sides commit to “preserving financial stability, market integrity, investor protection and fair competition, while respecting the parties’ regulatory and decision-making autonomy, and their ability to take equivalence decisions in their own interest”. It adds that equivalence assessments will be commenced by both the EU and UK “as soon as possible after the United Kingdom’s withdrawal from the Union, endeavouring to conclude these assessments before the end of June 2020”. It also talks of “close and structured cooperation on regulatory and supervisory matters, grounded in the economic partnership and based on the principles of regulatory autonomy, transparency and stability, recognising this is in the parties’ mutual interest”. But experts have warned that the withdrawal agreement and political declaration on financial services, which envisages future trade based on equivalence, risks disappointing the insurance industry and, in turn, its customers. Bob Haken, partner at law firm Norton Rose Fullbright, said the focus on equivalence is “unfortunate” for the insurance industry because, unlike some other financial services, equivalence under Solvency II does not grant market access for insurance business. “At present therefore, it seems unlikely that the withdrawal agreement or political declaration will preserve passporting rights for UK insurers,” he said. This means in order to serve European customers, insurers will need to set up operations in the EU. Mr Haken noted that reinsurance is treated differently under Solvency II and equivalence does come with market access. “For reinsurance, there is a glimmer of hope in that there is a commitment to reaching equivalence decisions as soon as possible after 29 March 2019 endeavouring to conclude those assessments by 30 June 2020,” he said. The legal expert also said that neither the withdrawal agreement or political declaration recognises the important issue of contract continuity following the expiry of the transitional period. This is a “missed opportunity” and means that contingency plans many insurers had hoped would be unnecessary will have to be deployed by the end of 2020, explained Mr Haken. Christopher Croft, chief executive of the London and International Insurance Brokers’ Association, said it is encouraging to see a dedicated section on financial services in the draft Brexit agreement. But he reiterated that equivalence is unlikely to provide solutions for brokers. “The current European legislation covering insurance brokers – [the] Insurance Distribution Directive – has no concept of equivalence or the market access rights it might grant. Without this, it is unclear what the agreement published yesterday would mean for our sector,” said Mr Croft. “We have to hope that the fact the draft is solely built around the concept of ‘equivalence’ is for the sake of brevity and simplicity. Otherwise, those of us who have no equivalence regime have cause for serious concern. As do our clients,” he added. The CEO of the London Market Group (LMG), Clare Lebecq, welcomed the draft agreement as an “important step closer towards avoiding a cliff edge that would cause significant disruption to clients across the UK and the EU”. “The LMG has consistently highlighted the mutual benefits for both the EU and the UK in an enhanced equivalence regime for commercial (re)insurance trading, including a provision for insurance broking services. We will continue to play an active role in representing the interests of our clients and firms as we work with the government on a suitable framework,” she added. When it comes to trade in goods, the political declaration agrees in principle to the need for comprehensive arrangements creating a free trade area, combining deep regulatory and customs cooperation, and building on the single customs territory provided for in the withdrawal agreement. Both sides say they wish to make the trading relationship as close as possible. Exactly what balance of rights and obligations will be compatible with the integrity of the EU’s single market and customs union, and the development of the UK’s independent trade policy, will be the subject of the future relationship negotiations, it adds. The withdrawal agreement and political declaration must now get the stamp of approval from the UK Parliament, which looks increasingly tricky given the cabinet resignations, and the 27 other EU member states. The EU’s chief Brexit negotiator Michel Barnier said this morning that the agreement is fair and balanced, provides for an orderly withdrawal, takes into account the UK's needs and lays the groundwork for an "ambitious new partnership". He explained that EU member states will analyse the document and at the end of the week, national envoys will share their assessments. A political declaration on future ties between the EU and the UK will be agreed by Tuesday. EU members will then have 48 hours to evaluate that declaration. The EU Council will meet on 25 November to finalise the agreement "if nothing extraordinary happens”, said EC president Donald Tusk. All leaders of the 27 EU nations must approve the deal. Mr Tusk said: "Since the very beginning, we have had no doubt that Brexit is a lose-lose situation, and that our negotiations are only about damage control." Addressing the UK, he added: "As much as I am sad to see you leave, I will do everything to make this farewell the least painful possible, for you and for us."

Insurance market observers unconvinced by draft Brexit agreement

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