A number of insurance firms, mainly non-life, are at an advanced stage of their contingency planning and have started implementation.
For the L&P sector, the status of contingency plans tends to depend on the firms’ business perspective in Europe. On the one hand, some L&P firms with ‘open’ overseas business, conducted either by branches and/or freedom of services and which they want to continue writing, have been quick to mobilize plans and are at an advanced stage.
On the other hand, most L&P firms with legacy books and/or migratory policyholder issues have been only recently mobilizing.
With limited time left before the UK formally leaves the EU in March 2019, ahead of a planned, but not yet agreed, 21–month transition period, Brexit poses unique challenges for L&P firms due to the long-term nature of the business, the mobility of people, uncertainty over key regulatory concepts and the changes to the geographical perimeter of the single market.
In this paper, we outline the key areas of concern for L&P firms and discuss some of the options that may be available, depending on their circumstances; and the capital, tax, people and regulatory issues they need to bear in mind when considering these solutions.
Coping with uncertainty
Once the UK is no longer subject to European law, the ability of UK insurers to passport, i.e., to conduct business via freedom of establishment or freedom of services, into other European Economic Area (EEA) states will be lost.
What that actually means in practice for UK insurers depends on national interpretation of matters on which European Directives are vague or silent.
It is possible that, in the absence of an agreement to the contrary, UK L&P firms with policyholders in the EU will lose the legal right to continue to service them once the UK has withdrawn from the EU if they have not taken appropriate actions beforehand.
What is certain is that without appropriate contingency measures in place, UK firms will be unable to conduct new business in the EU27.
Responding to Brexit involves making assumptions on key areas of uncertainty, as the post UK withdrawal trading environment has yet to be determined. However, with now less than eight months remaining until the UK’s formal withdrawal, and doubt lingering over whether the planned transition period will be agreed, L&P firms cannot afford to wait and see. Implementation timelines are measured in months, and waiting may mean it is too late to put a solution in place.
The impact of Brexit on L&P firms will vary. However, as part of contingency planning, L&P firms should understand the implications and the scale of the problem and then identify possible solutions, including any dependencies upon a political resolution to the legacy business issue.
Therefore, as a first step, L&P firms should assess the scale and nature of the business that is exposed by the withdrawal of the UK, determine if contingency measures are possible and decide how to communicate the impact of Brexit to customers.
When developing contingency plans, as part of the strategy, the following should be considered:
1. The nature of any free trade agreement
The UK Government has accepted that financial services ‘passporting’ in its current form will no longer exist after Brexit and the insurance industry has been planning for some time on this basis.
The UK Government has expressed a wish for a deep and comprehensive trading relationship including financial services; however the details are elusive so far, and EU negotiators have emphasized that financial services cannot be cherry-picked for special access.
2. The implementation period
The EU Council has agreed, in principle, to an implementation period for 21 months from 29 March 2019, whereby the UK will remain part of the EU’s legal and regulatory framework, thereby providing additional time for insurance firms to prepare for the new post withdrawal trading environment.
However, as this implementation period is still subject to further negotiations and forms part of the withdrawal agreement, it has yet to be agreed, providing extremely limited time to implement contingency measures if in fact no such period is agreed.
In view of this, many insurers, including life companies with ‘open’ European business, are proceeding with their contingency plans on the assumption that the UK will leave the EU without an agreement or implementation period, on 29 March 2019.
3. Continuity of service
Many insurance contracts will ‘cross over’ the date of Brexit and there are several ways in which life, pensions and investments contracts could create cross-border issues after this date.
Life insurance poses particular challenges when the geographical perimeter of the market changes, because of the long-term nature of the business and the mobility of people. Passporting has conveniently obscured local legal frameworks, but these must now be taken into account. In particular, UK L&P firms must look to local law to define key concepts, including what brings an insurer within the scope of regulation.
There may still be an agreement between the UK and the EU27 whereby firms can continue to uphold the rights and obligations of insurance contracts until the end of the contract without the need for authorization in the relevant EU27.
Regulators have asked firms to plan on the basis that authorization in the EU27 will be required. The UK has taken unilateral action with a commitment to a ‘Temporary Permissions’ regime (whereby EEA firms currently operating in the UK under passporting can continue to do so for a time-limited period after the UK has left the EU).
The EU27, on the other hand, have not provided the same assurance for UK-based insurers who conduct EEA business, and has no blanket mechanism for doing so. It is possible for an EEA state to take action along similar lines to the UK Government on a ‘Temporary Permission’ regime but none has done so to date.
4. EIOPA opinion on disclosure of information to customers
In June 2018, EIOPA released an opinion calling on national supervisory authorities (NSAs) to remind insurers and intermediaries about their duty to inform policyholders and beneficiaries of the possible impact on their contracts of the withdrawal of the UK from the EU and the contingency measures being taken or planned.
Following the issue of the opinion, NSAs may increase their focus on the customer communications of L&P firms. National provisions such as the UK’s requirements for treating customers fairly also impose duties to communicate information.