Brexit: the end is just the beginning
As a result of Brexit, decisions are being made that will change the insurance landscape for good. The three years of intense focus on how the UK will leave the European Union have diverted attention away from the sobering reality that the current phase of negotiations only marks the first stage of a process that could dominate most of the next decade.
Only once the UK has ceased to be a member of the European Union – whether under the terms of a deal with the EU27 or with no deal – can the serious negotiations about the future trading relationship with the EU begin. If the furore surrounding the basis on which the UK’s membership of the EU should end has left businesses uncertain, nervous and often confused, the prospect of politicians trying to negotiate detailed trade deals sector by sector is a chilling one.
Business, including the financial services sector, has lost patience with politicians and with good reason. The widespread ignorance across the political spectrum about the impact Brexit could have on businesses has left firms with little option but to prepare for an abrupt, brutal and possibly chaotic “no deal” exit, while hoping for something a little softer. For insurers and brokers, this has meant making decisions about which clients and contracts need to be serviced from within the EU27 and where to base the operations that service that business.
“The real challenge with Brexit has been, I think, coming up with solutions that are long-term value accretive for customers and the business as a whole, and not just focused on dealing with short-term issues such as the potential loss of passporting rights,” says Carl Blake, Legal Director at Bupa Global. “Most insurers’ plans will be well advanced and I suspect most will have planned on the basis of a no-deal Brexit given it is still on the table.”
Choosing a new domicile
Bupa Global will be serving from Dublin customers in the European Economic Area (EEA) who have international private medical insurance. Luxembourg has been another popular choice for insurers, while Lloyd’s decision to pick Brussels as its new EU base has induced some London market firms to follow it there.
These decisions have not been easy for businesses, says Graeme Trudgill, Technical Director at the British Insurance Brokers’ Association: “Dublin has been a key destination for brokers, but it has created huge costs for our members who trade internationally.”
With other locations such as Paris, Frankfurt and Malta still working to attract firms, the final picture has still to emerge, says Dr Alexandra von Westernhagen, a specialist in EU competition law at DAC Beachcroft in London: “There hasn’t been a clear winner. It shows that London is a launchpad that cannot be easily replaced.”
“The specialty insurance written in London is of a quality that is hard to replicate elsewhere,” adds Lisa Broderick, Partner and Location Head at DAC Beachcroft’s Dublin office.
Mathew Rutter, a Partner at DAC Beachcroft in London, agrees: “Is there going to be another EU centre of insurance? If there is, it is not clear where that could be.”
The success of Dublin in financial services is, however, creating problems, says Broderick.
“The flip side of San Francisco’s success in the tech sphere was pressure on infrastructure and housing. Dublin is similar. There is an awful lot of talent. We are also victims of our own success. The tech and banking spaces are extremely active so it is hard to find accommodation or to get your children into school, for example. The Government is looking at ways to address these challenges.”
Single market or customs union
Much of the political debate in the UK has surrounded the customs union but this only covers trade in goods – just 15% of the UK’s gross domestic product.
“The customs union has no impact whatsoever on services,” says von Westernhagen. The single market, often referred to as the internal market, provides the basis for insurers and brokers to trade freely throughout the EU and the EEA. “No-one is really talking about remaining in the internal market, which would be the pre-requisite for financial services to remain trading on the current basis with full passporting rights,” she adds.
Transitional arrangements
If the current Prime Minister, Boris Johnson, succeeds in negotiating a revised withdrawal agreement between the UK and the EU27 in some form, there is a range of potential transitional arrangements that might ease the post-Brexit landing. The Withdrawal Agreement between the EU and the then Prime Minister Theresa May, which was intended to come into effect at the end of March 2019, provided for an implementation period lasting until the end of 2020, with potential to extend, during which UK insurers and brokers would have maintained full passporting rights. It seems reasonable to assume that any revised withdrawal agreement would include a similar transition period.
Whether or not there is a withdrawal agreement, national regulators do have scope to make things easier and the UK has been leading the way on this front.
The Prudential Regulation Authority and Financial Conduct Authority (FCA) have put in place a Temporary Permissions Regime (TPR) to allow EU firms to continue to enter into new business and renew existing business after passporting falls away, for up to three years. For firms that do not intend to accept new business from the UK after Brexit, or which leave the TPR without seeking UK authorisation, there is a run-off option called the Financial Services Contracts Regime. The PRA and FCA have both also proposed “standstill” periods to give firms a limited period of time in which to adjust to the UK’s post-Brexit regulatory regime.
A number of the 27 EU member states have proposed or implemented transitional arrangements that would help UK firms. However, many of these are short term in nature, and are limited to the running off of existing insurance policies. They may help with the issue of contract continuity, at least for a limited period, but for all other purposes insurers and brokers must assume a regulatory cliff edge.
In the longer term, EU-domiciled insurers will have to make big decisions, says Dr Alexander Beyer, a Partner at Legalign firm BLD in Cologne: “The real difficulty is the uncertainty, but most now expect it to end with a no-deal Brexit. Firms are having to decide whether to transfer business, set up new branches or get a new licence.”
Outstanding issues
There is a very long list of outstanding issues that will need to be addressed, either before Brexit or in any transitional phase after the UK formally leaves the EU.
Even if the UK works hard to maintain equivalence with European regulation to make the transition easier, there are some regulations that have no equivalence regime. Among these is the recently implemented Insurance Distribution Directive (IDD), says Trudgill: “Under article 16 of the IDD, there is no definition of a third country. This affects how EU brokers trade with wholesale brokers in the UK. The European Insurance and Occupational Pensions Authority (EIOPA) has left it to each national state to decide.”
There are several personal lines insurances that will be adversely affected by Brexit, especially travel.
Around 60% of UK travel insurance cover is passported in from the EU and most of that capacity has indicated it will apply under the TPR so it can keep writing business in the UK. UK drivers travelling to the continent will probably have to obtain a Green Card to show their insurance covers them for driving in the EU, while the European Health Insurance Card could go, warns Trudgill: “That model is in jeopardy if we do not get a reciprocal agreement. It was, potentially, covered in the original Withdrawal Agreement, but failing that, it will be up to the UK Government to establish bilateral agreements with individual member states.”
One area where UK regulators are still being pressed for clarity is over the ability of EU registered life companies, such as those in Ireland, to sell into the UK. The FCA has said in its amended Conduct of Business rules that UK advisers will not be able to promote EU products, but may promote products from firms based elsewhere, such as the Isle of Man or Iowa. A perverse approach, according to Rutter: “We hope the regulators find an early opportunity to iron out some of these wrinkles.”
Broderick also highlights the importance of national regulators sharing information after Brexit: “This is something which was mentioned by the European Securities and Markets Authority (ESMA) Chair, Steven Maijoor, in a recent speech in Dublin. He said that, as trading will continue on a cross-border basis with the UK, it is essential that regulators continue to exchange data with the UK FCA. He made the important point that global integration of financial markets can be viable in the long term only if regulators can continue to access important data on a cross-border basis.”
If Brexit is cancelled
Even at this stage, it is still possible that the UK could reverse its decision to leave the EU. However, cancellation of Brexit would be unlikely to see any of the decisions made by UK and European insurers rolled back, says Rutter.
“If the UK is still part of the passporting regime they could choose just to run off the business they have re-domiciled, but most are likely to keep their new branches operational now they have established them.”
According to Beyer, most of the plans are now so advanced that they would be very unlikely to change, regardless of what happens on the political front: “They have put a lot of effort and cost into managing this so they will be carrying out their plans even if Brexit is cancelled.”
Some firms are still gambling on a resolution that sees the UK staying in the EU, says von Westernhagen: “I am still surprised by how many are planning for a no-Brexit scenario. Some have kept that option open.”
Slashing red tape
Politicians campaigning for Brexit have made much of what they claim is the burden of European regulation and have heralded Brexit as an opportunity to cast some of this off. This is unlikely to happen in the financial services sector, says Rutter.
“The regulators have rejected the idea that there will be a bonfire of regulation, although they will have more flexibility. If there is some form of enhanced equivalence, that will limit the UK regulator’s scope for being flexible and moving away from the EU regime.”
Von Westernhagen says she believes it unlikely that the UK would repeal many European regulations: “The UK has been a major influence in Europe and responsible for many regulatory initiatives. It has actually opposed only 2% of EU laws that have been passed in the last 20 years.”
Uncertainty to continue
If Brexit goes ahead, there will be years of negotiations over trade with the EU and the rest of the world that will periodically draw the insurance industry in.
If it is cancelled, whether by Parliament or a second referendum, the debate will continue, warns Rutter: “We will not be in a stable position even if Brexit doesn’t go ahead. There will still be political pressure to review the UK’s relationship with the EU.”
No Brass Plates
Key regulatory bodies EIOPA and ESMA have said that, if any insurer wants the benefits of having an EU office, then the EU presence must be a genuine one, be properly staffed and retain risk. Any attempt to relocate operational functions back to the UK or use “brass-plate” subsidiaries will be policed by the regulators.
Gabriel Bernardino, Chairman of EIOPA, made it clear brass plates will not be tolerated and, to date, national regulators have heeded this tough message.
“Sound supervision demands appropriate location of management and key functions. Empty shells or letter boxes are not acceptable. EIOPA will continue closely to monitor the developments and any possible effects on financial stability and consumer protection applying a risk-based approach and using information collected from the national supervisory authorities.”
