The legal implications of a no-deal Brexit

The industry has demonstrated great resilience and forward planning to put itself in as good a position as it really could have done in light of the challenges around Brexit.

UK insurers have established more than 40 EU insurance subsidiaries and the Association of British Insurers has estimated 29 million policies have been transferred by way of Part VII transfers.

The European Insurance and Occupational Pensions Authority (Eiopa) recommendations have come out, which would belatedly give clearance for UK insurers to continue to pay claims in Europe. That will help many insurers that have not yet completed their contingency plans.

However, in the case of a hard Brexit, it does not allow them to write new business or renew existing business, so those challenges remain, although EU subsidiaries have been established that enable most groups to continue.

There are three basic problems. The first is equivalence. In the event of a hard Brexit, it is likely the UK will not be granted equivalence immediately, meaning UK reinsurers will be treated as third parties, and that may well have an impact on the ability for European cedants to claim credit for reinsurance.

The second is the operational challenges from the new models. These are new structures for business and companies need to ensure the implementation is compliant. I am particularly thinking of the role of UK underwriting staff, who may be taking on roles for both the UK branch of the EU subsidiary and the UK insurer itself.

Finally, it is the position of reverse branches of European insurance companies with UK branches where those UK branches have been set up to underwrite EU risks only through UK staff. Again, I think some of those models are largely untested and it is going to be important to ensure these are done in a compliant manner.

Distribution issues

For brokers, the Eiopa recommendations from February 19 makes nine recommendations, the last of which is in relation to distribution activities. In it, Eiopa refers to the need for intermediaries to be registered if they are going to continue distribution activities to EU27 policyholders and for EU27 risks after the UK’s withdrawal.

Brokers need to look at their business models and ensure they are compliant. They may well have to use EU subsidiaries, like insurers, for EU business. Now, broker reorganisations are relatively straightforward compared to insurers. They do not require Part VII transfers and there is no complex business transfer, although some assets and contracts will need to move.

What it does mean is brokers need to look at their human resources capabilities and decide who is going to be undertaking what activities for which entity and in what capacity. That involves a lot of internal plumbing for intermediaries, although nowhere near as much as the carriers had to put in for Brexit.