When the UK withdraws from the EU, and at the end of any transition period, passporting rights that currently exist between the UK and countries in the European Economic Area (EEA) are expected to cease, said A.M. Best in a new briefing.
Once passporting rights are lost, UK-domiciled insurers will no longer be able to issue insurance contracts in the EEA, said the report, noting that it is also possible that, in the absence of a political solution, they will not be able to service existing EEA contracts by settling and paying claims.
In the event of a “no-deal” (or “hard”) Brexit, this could happen as early as March 29, 2019, or longer if a transition period is agreed upon.
A.M. Best expects, however, that UK companies will still be able to underwrite reinsurance business on a cross-border basis post Brexit, in all but a small number of EEA jurisdictions.
The Solvency II regulatory treatment of these contracts will depend on whether the UK is granted reinsurance equivalence by the EU, said the ratings agency.
The UK’s draft agreement on the UK withdrawal from the EU, which was published on Nov. 14, 2018, states that financial services equivalence assessments by both parties will commence as soon as possible after the UK’s withdrawal and that both parties will endeavor to conclude these assessments before the end of June 2020, explained the Best’s briefing.
Companies domiciled in other EU countries that conduct insurance business in the UK also will be affected by a loss of passporting rights, said the report, noting that the impact will be cushioned by the UK government’s Temporary Permissions Regime (TPR), which will allow EEA insurers to operate in the UK for a maximum of three years post Brexit while they seek authorization from UK regulators.
New EU Subsidiaries Established
Historically, Lloyd’s, the London market and other UK-based commercial insurers have underwritten EEA business on a cross-border basis, but since the referendum in June 2016, these insurers have been working to ensure they are able to continue to provide insurance services to EEA customers when the UK leaves the EU, indicated the report.
While many companies have chosen to establish new EU subsidiaries, A.M. Best said some smaller insurers, which do not have the resources to create additional companies, have formed relationships with local carriers to front business for them.
A.M. Best expects rated insurance groups affected by Brexit to have these subsidiaries or arrangements in place by March 2019, ensuring that they are able to underwrite EEA business going forward, even in the absence of a transition period.
Transfers of EEA Portfolios
“The creation of a licensed EU subsidiary or affiliate does not, however, address the issue that a UK insurer may not be able to service existing EEA contracts following a loss of passporting rights,” said the report. “It is the hope and expectation of the insurance market that a political solution will be found to this problem, for example by allowing grandfathering of existing contracts.”
Nevertheless, insurers are putting contingency plans in place and exploring their operational and legal ability to settle claims and provide other services to policyholders in individual EEA jurisdictions, it continued.
The majority of insurance groups affected by Brexit have either completed or initiated a transfer of their EEA business from their UK insurer to an affiliated EEA insurer under Part VII of the Financial Services and Markets Act 2000, which is expensive and time consuming as transfers are subject to regulatory scrutiny and court approval, explained the report.
“The process is further complicated if business has been underwritten on a pan-European basis, as is often the case for large commercial clients, as it is difficult to separate assets and liabilities into UK and other EEA components,” the report said.
As a result, a number of transfers will not be completed by the end of March 2019, so, for these cases, a transition period following the UK’s withdrawal from the EU will be necessary, A.M. Best affirmed.
A.M. Best noted that Lloyd’s will transfer all of its EEA business to its Brussels-based EU headquarters by the end of 2020 and has said it will continue to honor its contractual commitments and pay all valid claims in the event that the UK leaves the EU without a transition period before the transfer is complete.
The UK’s Financial Conduct Authority supports this strategy, which market participants believe will be upported by other European regulators, “as it is consistent with treating customers fairly,” said the report.
“Nevertheless, affected insurers are considering the possibility that this support will not be forthcoming and are exploring other steps they could take to ensure that they are able meet their obligations to EEA policyholders,” said A.M. Best.
Source: A.M. Best
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