Brexit: what the next 12 months will mean for the insurance sector

Is the UK actually leaving the EU?
Yes. Although it is possible to imagine circumstances in which the UK doesn’t leave the EU, they don’t seem at all likely. Both major UK political parties support the move with more or less enthusiasm; negotiations have continued steadily; and the political and economic environment has not changed sufficiently to cause a substantial change of mood in the UK electorate. My guidance to clients is: assume the UK is leaving.

It seems a long process. How far through it are we?
It depends when you start the clock – and when you think it will stop. If you start the clock at Referendum Day, 23 June 2016, and stop the clock on the day the transition period is slated to end, 31 December 2020, then we are somewhat short of half way.

Why is it taking so long?
First, because the EU is a highly complex structure from which it is difficult to extricate an embedded member. That accounts, among other things, for the 21 month transition period.  Second, because it’s never been done before. Third, because the EU decided that negotiations must proceed serially, in the order in which the Council decided is important: so the divorce bill and citizens’ rights came before talking about a free trade agreement (FTA).  And fourth, because the UK Government has not found it easy to agree internally about what its objectives are.

Not necessarily in that order of importance.

From an insurer’s point of view, how much do we know about what 2021 looks like?
Not enough yet. We know that both sides intend to negotiate a FTA. We know that both sides intend the FTA to include services: the British said so in January 2017, and in March 2018 the Council issued its guidelines for the Commission negotiators which makes explicit reference to services as part of the proposed FTA. We can be reasonably confident that financial services, including insurance, will feature in the FTA to some extent, because the same guidelines rule out a sector-by-sector approach. So if anything at all is agreed on services, it should include insurance. The currently unanswerable question is, what can be agreed?

So what might be agreed? What’s the EU’s position?
In their guidelines, the Council talks of three areas. First, “movement of natural persons”, presumably this means some provision for the easy or frictionless granting of work visas or permits. Second, the mutual recognition of professional qualifications. And third, most significantly from the point of view of the London insurance market, “allowing market access to provide services under host state rules, including as regards right of establishment for providers.” However, the guidelines then immediately caution that this must be “consistent with the fact that…the Union and the UK will no longer share a common regulatory, supervisory, enforcement, and judiciary framework.”

And what’s the  UK’s position?
The UK Government’s starting position on this was contained in the Chancellor’s speech at HSBC on 7 March 2018: “First, we will need a new process for establishing regulatory requirements for cross-border business between the UK and EU. It must be evidence-based, symmetrical, and transparent. And it must reflect international standards. Second, cooperation arrangements must be reciprocal, reliable, and prioritise financial stability. Crucially they must enable timely and coordinated risk management on both sides. Third, these arrangements must be permanent and reliable for the businesses regulated under these regimes.”

When will we know for sure what has been agreed?
Not for at least a year. The Council’s guidelines state clearly that although work can start on the FTA, it cannot be finalised or concluded until after the UK has left the Union. The above matters are inherently very complex. It seems reasonable to assume that important matters will still be unresolved, well into 2019 or even later.

By which time the transition or implementation period will have started. What do we know about that?
A fair amount, although not with absolute certainty. The EU Council issued guidelines on 29 January 2018 which set out their position in some detail. In particular, the whole of EU law and any changes to it will apply to the UK; the UK stays in the Single Market and the Customs Union; and the full competence of EU institutions is preserved. The UK position had been summarised in a speech by David Davies in Teesport two days earlier and was remarkably similar: “Both sides must continue to follow the same, stable set of laws and rules, without compromising the integrity of the single market, and the customs union to which we will maintain access on current terms; maintaining the same regulations across all sectors of the economy — from agriculture to aviation, transport to financial services….in keeping with the existing structure of EU rules that will allow a strictly time-limited role for the European Court of Justice during that period. During this…period, people will of course be able to travel between the UK and EU to live and work.” Both these positions were incorporated in the text of the Withdrawal Agreement which was issued at the end of March 2018, with the parts referring to the transitional period highlighted in green to indicate that they were agreed.  So essentially, at a practical level, it seems likely that very little changes.  This all assumes that the Withdrawal Agreement is actually ratified, which is a reasonable working assumption but by no means certain.  

Finally, for EEA-based insurance businesses trading in the UK, the position was further clarified on 20 December 2017 by the FCA which announced that the UK Government “will if necessary legislate for a temporary permissions regime. This regime will enable relevant firms to undertake new business within the scope of their permission, enable them to continue performing their contractual rights and obligations, manage existing business and mitigate risks associated with a sudden loss of permission. For firms that are solely regulated in the UK by the FCA they would need to notify the FCA before exit day of their desire to benefit from the regime but this notification for temporary permission will not require the submission of an application for authorisation.”

When will we know 100% for sure?
Not until the Withdrawal Agreement is formally ratified, which is towards the end of 2018.

So what are your clients doing?
It depends on who they are. My guidance to all insurance clients has been that they should at least have a properly worked-through contingency plan, and indeed most do now have that.  Specifically, if a client is PRA authorised, they had to supply that to the PRA in July of last year. From then on, it is largely a matter of how exposed a client is to trading in the EU. If it is 100% mission-critical to a UK-based insurer client to be able to trade seamlessly in the EU, then they cannot really afford to wait until the transition period is finally confirmed or the details of the FTA become clear, which may in the latter case may not be until late 2019 or even 2020. Accordingly they will probably already have chosen their preferred EU location, have an authorised vehicle established, be a fair way down the process of on-boarding staff and infrastructure, and sorting out the legalities of transferring the existing portfolio of clients into the onshore entity. Insurance businesses for which a solution is important but not so critical are usually a bit further back in the process: they have selected their location and probably got it authorised but may not be so far down the road of spending money on people and kit and lawyers. Some businesses can afford to wait and they may have selected their location or a suitable interim trading partner. Others probably have to wait. This applies particularly to some insurance intermediaries who have the additional complexity of not yet knowing how the EU’s Insurance Distribution Directive will be interpreted by the various EU regulators.

For EEA-based insurers operating in the UK, the PRA issued a consultation paper on 20 December 2017. This proposed that, in considering an application for branch authorisation of existing UK operations, the PRA will undertake an assessment of regulatory equivalence and the ‘supervisability’ of the insurer. This will look at whether the home jurisdiction’s prudential supervision regime is ‘broadly equivalent’ in an assessment of equivalence which is likely to be linked to formal determinations of equivalence in respect of Solvency II. The unstated implication was that in the first instance at least, the PRA would look favourably upon branch authorisations from EU-based insurers.

So what happens next?
Work can now commence on the FTA. Watch this space.

For more information on Brexit, or to discuss how Brexit will affect you as an insurer, please contact us.

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