Navigating the Brexit trap

With the final shape of Brexit still up in the air, insurance buyers in the EU purchasing cover from the UK continue to face uncertainty. Herman Kerremans, chief development officer at JLT Belgibo, advised buyers to “be prudent”, swap their current UK-based insurer with its counterpart in the EU, or use Brexit continuity clauses. Speaking at CRE’s Risk Frontiers Brussels conference on claims and coverage certainty, Mr Kerremans put forward three Brexit scenarios. The first is hard Brexit, or no deal, under which the UK leaves the EU on 29 March 2019 without any agreements on trade or customs arrangements. The second scenario is soft, or softer, Brexit, whereby the UK leaves with agreements on various issues such as a transition period that allows for an orderly exit and time to legislate the future relationship. The third option put forward by Mr Kerremans is no Brexit, with the UK deciding to stay within the EU or postpone Brexit, either with or without a second referendum. Under the hard Brexit scenario, UK insurers would lose passporting rights and no longer be able to operate in the EU or provide a service to EU clients. UK brokers providing a retail service to EU clients would face the same problems. There would be exceptions to these rules. Non-admitted insurance is generally accepted for marine, aviation and transit risks based on World Trade Organisation regulation. But the EU announced in 2015 that it will tighten regulation that governs such non-admitted business. In addition, cross-border reinsurance would probably be accepted because it falls under the EU’s equivalence principle. This allows reinsurance to be bought between companies in the EU and other regions if the regulatory regimes are deemed equivalent. It is likely that the EU would accept the UK has an equivalent prudential and solvency regime, given that it has implemented Solvency II. Equivalence cannot be granted for primary insurance, however. Mr Kerremans said no Brexit or soft Brexit would be the best solutions for EU clients. A soft Brexit would see a transition period until at least the end of 2020. Until then it would be business as usual, with time to settle portfolio transfer and the best way forward for renewing business. There is also hope that any future trading relationship between the EU and UK, including a deal on financial services, would be clearer by this point and provide at least some clarity for insurance buyers. But Mr Kerremans also offered some potential solutions for insurance buyers in the EU if they face a hard Brexit scenario. He advised buyers to renew their policies and insurance programmes starting from 1 January 2019 or later with insurers licensed in the EU. This could be an insurer that belongs to the same group as an organisation’s current UK-based insurer. For example, Lloyd’s has set up Lloyd’s Brussels for this very purpose, while AIG has set up in Luxembourg, with RSA following suit. Buyers are also advised to renew their insurance with a broker licensed in the EU. This is not a problem for those using large brokers that have subsidiaries across the area. But Mr Kerremans stressed that London headquarters could not technically provide any direct retail service to clients in the EU. He also advised buyers renewing in January with a London market company as lead or co-insurer to make sure they have a Brexit contract continuity clause in place. Such a clause will provide comfort that in case of a hard Brexit, your current London insurer will be “subrogated” by its subsidiary or “sister company” licensed in the EU, explained Mr Kerremans. There are several such clauses, including one by the International Underwriting Association. They basically state that a contingent insurer licensed in the EU will take over from any London-licensed insurer if a hard Brexit takes place. For renewed business, Mr Kerremans advised insurance buyers to “be prudent”, adding: “Try to negotiate mid term and ahead of Brexit. Use a Brexit continuity clause or replace you current UK-licensed insurer by its counterpart in the EU.” But what about insurance policies placed pre-Brexit but still running after the UK exits the EU? It is believed that such policies will generally be considered valid, explained Mr Kerremans, but there remain concerns about contract certainty given the unchartered territory. Guy Verhofstadt, president of the EC, said in October: “For the rather limited number of cross-border EU-UK insurance contracts that would still be in place after the UK’s withdrawal, they would remain valid and the performance of existing obligations under the contract could generally continue to take place.” Meanwhile, Lloyd’s recently confirmed that it will respect its contractual obligations and pay claims, whatever the outcome of Brexit. At the same time, several UK insurers are planning to transfer complete portfolios of longstanding EU policies to their counterparts in the EU or vice versa. This Part VII transfer however is likely to take a couple of year at least to complete, said Mr Kerremans, and is a workable solution in the case of a soft Brexit that includes transitional arrangements.

Navigating the Brexit trap

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