Many are now establishing their European subsidiaries to enable them to continue servicing EEA policyholders. EEA insurers have, in general, been slower to recognise the full implications of their loss of access to the UK.
One of the most challenging considerations is ensuring that insurance contracts legally written pre-Brexit under passporting rights can continue being serviced post-Brexit. While Brexit is not expected to change the validity of the insurance contracts, the licences that currently enable their servicing will cease to have effect at the point the UK leaves the EU. Both Solvency II and UK law prohibit unauthorised insurance activity, unless covered by the exemptions in both legislative frameworks.
There were a number of developments in December that make clear that this is not a one-sided issue and that both UK and European insurers need to have realistic Brexit contingency plans and be positioned to put these into effect on a timely basis to ensure that policyholders are not exposed to the risk of non-payment and that no unauthorised insurance activity arises.
On 20 December, the PRA issued a consultation paper on its approach to branch authorisation and supervision of non-UK insurers. At the same time, HM Treasury1 announced that it would (if necessary) amend legislation to permit EEA firms to hold a “temporary permission” allowing them to continue UK activities and ensure they can meet their contractual obligations under pre-Brexit insurance contracts. Affected EEA insurers would need to go through the full UK authorisation process before its expiry.
The following day, EIOPA issued an Opinion entitled “Opinion on service continuity in insurance in light of the withdrawal of the United Kingdom from the European Union”. This paper emphasised the need for both UK and EEA insurers to develop contingency plans to prevent unauthorised insurance activity, and for supervisors to assess their robustness and oversee their implementation by the UK withdrawal date.
While EIOPA recognises the issue, the paper offers no new solutions. There is for example no consideration of a “temporary permission” in the way the UK has proposed - something that seems possible under the provisions of Article 171 of Solvency II. Instead it merely sets out the well-known (and costly) options of establishing new entities/branches and portfolio transfers. The third option outlined of redomiciling any UK insurer legally structured as a Societas Europaea (SE) into an EEA country fails to mention that this would need to be coupled with a portfolio transfer to achieve full separation of UK and EEA insurance contracts.
ll EEA insurers with UK policies will need to develop their Brexit contingency plans and discuss these with their local regulator.
Those insurers operating through a UK branch will already be aware of the requirement to apply for UK authorisation in order to continue operations post-Brexit. However, it is unclear to what extent those operating in the UK under freedom of services licences have considered this.
Full details of the exact scope and duration of the UK's proposed “temporary permission” have yet to be provided and we anticipate this will be strictly time limited. We also expect this “temporary permission” will need to be applied for (although with less formality than a full authorisation process), rather than being granted to all potentially affected insurers.
While this may offer some reprieve to those operating on a freedom of services basis, these firms will still need to determine the extent to which their activities would be regarded as being carried on in the UK and hence require authorisation.
The penalties for conducting unauthorised business in the UK, that is not otherwise exempt, are onerous and we are aware that some insurers are seeking to dispose of their UK portfolio as an alternative solution.