Insurance in Post-Brexit Europe

Posted on 22 January 2019

Insurance in Post-Brexit Europe

The insurance market has for a long time relied on both the freedom of services and freedom of establishment to passport insurance services across the EEA. On 29 March 2017, the stable conditions over which the insurance market had hitherto developed were disrupted when the UK started the formal process of leaving the EU under Article 50. As things stand, the UK leaves on 29 March 2019.  

Two general issues have since loomed large:  the ability to service existing cross-border policies, and the ability to enter into new insurance contracts following the UK's withdrawal from the EU. Whilst the insurance market hopes that the UK and the EU will legislate so as to provide insurers on both sides the continued ability to passport or, for existing cross-border policies at least, come to a mutual grandfathering arrangement, the Brexit negotiations have not yet provided sufficient clarity on these matters.

In the face of such uncertainty, UK insurers have started to mobilise. Lloyds, AIG, Tokio Marine and Prudential have set up subsidiaries in Belgium, Luxembourg, and Ireland. Part of Admiral's European business has been transferred to its Spanish entity. QBE, Sompo, Hiscox, CNA and RSA have all acted in similar ways. The common theme here being that all EEA business is being transferred to subsidiaries in the EEA, who will be validly authorised to write that business across the EEA.  Each will use the passporting rights of their EU subsidiaries - which must themselves meet stringent regulatory and capital requirements independently of their parent companies - to do this.

These arrangements have all required UK Court approval as transfers under Part VII of the Financial Services and Markets Act 2000. Such transfers (effectively statutory novations of all insurance contracts) always need to be sanctioned by the court, and applications can take the best part of a year, due to various formal requirements. The courts will also look to whether policy holders are materially affected by the transfer, focusing in particular on any solvency issues with the guidance of an independent expert, as well as any objections received from policy holders.

So far, all transfers have been approved but various issues arise, some of which may be litigated. First, all new EEA policies will need to be underwritten, and claims handled, in the EEA, and, not in the UK, or there is a risk that the UK entity may be carrying on insurance business illegally. This must mean, despite very little press on the subject, a mass migration of staff to the EEA, or perhaps more realistically, the hiring of new staff in the relevant EEA state. Both issues will cause disruption and potential claims. Second, Part VII transfers of existing historic business have, in other contexts (e.g. general business restructuring) met resistance from larger policyholders, particularly those in the US, who feel inherently suspicious that the insurer they contracted with is being swapped to another insurer who they don't know. There is no sign that resistance has arisen so far, probably because it is European business only that is being transferred, and kept within the relevant insurance group. But what of a US based multinational, with a main EEA presence in the EU (not the UK), but whose insurance was previously underwritten through London? These transfers cause concerns and questions, and possibly disruption, and it must only be a matter of time before a scheme is seriously challenged.

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