Brexit: UK insurers are preparing for loss of passporting rights
The agency said that it is closely monitoring the responses of UK insurers to the planned withdrawal of the UK from the European Union (EU), with a particular focus on those insurers that currently utilize the European Economic Area (EEA) passporting system to conduct cross-border business throughout the EEA.
The loss of the passporting rights that currently exist between the UK and the EEA is one of the main reasons of concern for the UK-domiciled insurers as it means that most probable at the end of the Brexit process - the end of any transition period -, they will no longer be able to issue insurance contracts in the EEA. "It is also possible that, in the absence of a political solution, they will not be able to service existing EEA contracts by settling and paying claims. In the event of a "no-deal" Brexit, this could come into effect as early as 29 March 2019," A.M. Best said.
Also, even if according the rating agency's expectations, UK companies will still be able to underwrite reinsurance business on a cross-border basis post Brexit in almost all EEA jurisdictions, "the Solvency II regulatory treatment of these contracts will depend on whether the UK is granted reinsurance equivalence by the EU." According to the political declaration, published on 14 November 2018 with the draft agreement on the withdrawal of the UK from the EU, financial services equivalence assessments by both parties will commence as soon as possible after the UK's withdrawal, both parties will striving to conclude end the process by the end of June 2020.
Companies domiciled in other EU countries that conduct insurance business in the UK will also be affected by a loss of passporting rights. However, the impact will be cushioned by the UK government's Temporary Permissions Regime (TPR), which will allow EEA insurers to operate in the UK for a maximum of three years post Brexit while they seek authorization from UK regulators, notes A.M.Best.
Hoping for the best, but preparing for the worst-case scenario, many of the large companies have already established new EU subsidiaries, while smaller players for which such an undertaking is too expensive, are in search of fronting arrangements with local carriers. The agency expects that most insurers will have a solution in place before March 2019, thus being able to further conduct their EEA business even in the absence of a transition period. Yet, transferring business to an EU subsidiary or affiliate not only that is far from being a simple and fast process, but neither addresses the issue that a UK insurer may not be able to service existing EEA contracts following a loss of passporting rights.
It is the hope and expectation of the insurance market that a political solution will be found to this problem, for example by allowing grandfathering of existing contracts, A.M. Best said, but to play on the safe part, "affected insurers are putting contingency plans in place and exploring their operational and legal ability to settle claims and provide other services to policyholders in individual EEA jurisdictions."
Yet, transfer of the EEA business from the UK-domiciled insurer to an affiliated EEA insurer under Part VII of the Financial Services and Markets Act 2000 "is expensive and time consuming, with transfers subject to extensive regulatory scrutiny and court approval. The process is further complicated if business has been underwritten on a pan-European basis, as is often the case for large commercial clients, as it is difficult to separate assets and liabilities into UK and other EEA components. Consequently, a number of Part VII transfers will not be complete by the end of March 2019. In these cases, a transition period following the UK's withdrawal from the EU is necessary to allow time for the transfer of policies to be completed," the agency explained.
On the UK side, Financial Conduct Authority supports a position according to which in the event that the UK leaves the EU without a transition period before the transfer is completed, Uk insurers' underwriters will continue to honor their contractual commitments including the payment of valid claims, as announced for example by Lloyd's. The general expectations are that other European regulators will also support this approach, as it is consistent with treating customers fairly. "Nevertheless, affected insurers are considering the possibility that this support will not be forthcoming and are exploring other steps they could take to ensure that they are able meet their obligations to EEA policyholders. A.M. Best will continue to monitor closely political developments in the UK and the EU, and the ability of rated insurers to fulfil their contractual commitments irrespective of the terms on which the UK leaves the EU," the agency said.