The UK’s decision to leave the EU has significant implications for the European financial services sector. Specifically, Brexit will have consequences for those financial institutions based in the UK who rely on the European Economic Area “passport” to access the single European market for financial services.
The future relationship between the UK and EU remains uncertain. If arrangements are not in place by 1 January 2021 passporting rights for financial services firms out of, and into, the UK will end. In this article, we look specifically at the impact Brexit has on insurance undertakings.
European Union rules and regulations will continue to apply to the UK and UK firms until 31 December 2020. European Directive 2009/138/EC (“Solvency II”) sets out the framework governing the activities of (re)insurance undertakings across the EU.
EU laws applying to (re)insurance, in particular Solvency II, will no longer apply to UK based insurance undertakings after 31 December 2020 This will have the following impact:
UK (re)insurance undertakings will no longer be able to provide services in the EU and will become third-country insurance undertakings. This means that those insurance undertakings will no longer be allowed to provide services in the EU, including through online sales, on the basis of their current authorisations.
Branches of UK (re)insurance undertakings in the EU will become branches of third country insurance undertakings. They will need an authorisation in the Member State of their activity to be able to continue to do business and will have to comply with the conditions set out in Solvency II. The authorisation of a branch; however, does not grant the right to conduct business across the EU, but only in the Member State that has granted the authorisation.
EU subsidiaries can continue to operate as EU insurance undertakings. This is on the basis of their authorisation in the Member State of establishment and subject to their compliance with the EU rules.
Solvency II is silent on how cross-border services business from a third country should be treated. Prior to the introduction of Solvency II, (re)insurance activity was regulated at an EU level by Directives 88/357/EEC, 90/619/EEC, 92/49/EEC and 92/96/EEC (“Solvency I”). Under Solvency I, it was possible for third-country (re)insurers to write business in Ireland on a non-admitted basis subject to compliance with certain conditions. However, these provisions were not carried over into Solvency II.
The European Insurance and Occupational Pensions Authority issued a set of nine recommendations to all national regulators within the European Economic Area (EEA), excluding the UK on 19 February 2020. It recommends the following:
Competent authorities should prevent that UK undertakings conclude new insurance contracts or establish, renew, extend, increase or resume insurance cover under the existing insurance contracts in their jurisdiction as long as they are not authorised for such insurance activities under Union law. This is without prejudice to policyholder rights to exercise an option or right in an existing insurance contract to realise their pension benefits.
The access provided to non-admitted insurance will depend on the specific rules adopted by each Member State. The position in Ireland would appear to be that non-admitted insurance is prohibited unless the insurer/ reinsurer is licensed in an EEA Member State.
Insurance firms in the UK are already seeking changes to the implementation of Solvency II when the transition period ends and the UK government is set to review how Solvency II is operating in the UK in the coming weeks.
The Prudential Regulation Authority, the supervisor of the UK insurance industry, previously acknowledged problems with the risk margin under Solvency II, but could not make any changes as this would require agreement at EU level.
In addition, the EU will also make amendments over the coming years to the insurance regulatory framework applying to EEA based firms, this will result in further divergence to the extent the UK does not adopt similar changes.
Time will tell if the EU insurance framework and the UK insurance framework will remain aligned, however, in the meantime, given a no-deal Brexit is fast becoming a reality, it is time for insurers based in Ireland and the UK to consider and implement their no-deal Brexit strategies.
For more information contact a member of our Financial Regulations team.
The content of this article is provided for information purposes only and does not constitute legal or other advice.