Brexit for the insurance sector: No-deal regimes in the UK and EuropeA guide for insurers and insurance intermediaries
Please note that this article considers preparations that were put in place in anticipation of a potential “no-deal” Brexit if no withdrawal agreement was concluded between the EU and the UK at the end of the Article 50 negotiating period. Different considerations will apply after 31 December 2020 following the end of the transition period agreed between the UK and the EU. We would be pleased to discuss issues arising from Brexit after the end of the transition period, including regarding UK insurers underwriting or paying claims in the EU, and EU insurers underwriting or paying claims in the UK. Please contact one of the authors if you would like to do so.
This guide has been prepared by DLA Piper's insurance regulation team to provide a high level overview of post-Brexit regimes that are being implemented in key EU markets, and in the UK. It is intended to help insurers and intermediaries with their planning in the run up to a possible no-deal Brexit.
DLA Piper's insurance team advises insurance sector clients on all aspects of Brexit and its implications, and can provide further information on any of the issues covered in this guide, and tailored advice on the implications of a no-deal.
Brexit planning in the insurance sector
Insurance and insurance intermediary groups, in particular those which have used UK-authorised firms to access EU markets, have used the period since the UK's 2016 Brexit referendum to develop and implement contingency plans for a Brexit in which the UK would cease to be part of the EU's single market for insurance and insurance distribution. For many, those plans have involved restructuring so they can continue to serve markets across the UK and Europe in compliance with law and regulation post Brexit, with separately licensed entities in the UK and a continuing EU state. Such restructurings have involved the set-up of new authorised firms, UK branches, redomiciliations and portfolio transfers. DLA Piper's insurance team in the UK and across Europe have assisted many clients with such plans and their implementation.
Other groups have decided to put their UK or EU businesses into run off and many had existing books of business in run off that licensed entities in the UK or EU may not be able to administer post Brexit. Even those groups which have restructured so they can enter into new business through licensed entities after Brexit may have "orphan" books which it has not been possible or practicable to transfer.
The prospect of a no-deal Brexit at the end of October 2019 has brought how such books will be serviced after Brexit into focus. Following recommendations from the European Insurance and Occupational Pensions Authority (EIOPA), many continuing EU member states have already taken steps to introduce no-deal regimes that will apply to UK insurers and intermediaries after Brexit.
At the same time, the UK has introduced regimes that will allow European firms to run off their existing business in the UK, and to continue to enter into new business where their intention is, ultimately, to establish separately authorised UK branches.
Deal or no deal ...?
As the political situation in the UK remains fluid, and the chances of a deal ultimately being reached are difficult to evaluate, there remains a significant risk of a no-deal Brexit. This could mean a "cliff edge" for the insurance sector in the UK and Europe, as no UK-EU withdrawal agreement means no transition period during which EU passporting rules would continue to apply to the UK and countries that will remain in the EU's single market. We hope this guide will be a useful resource for insurance sector groups seeking to prepare and plan for that cliff edge.
- United Kingdom no deal regimes
- No deal regimes in the EU 27
- No deal regimes in key continuing EU states
The UK government has made it clear that it wants European insurance (and other financial services sector) firms currently operating in the UK to continue to be able to carry out insurance business, including writing new contracts as well as servicing existing contracts, for a temporary period after a no-deal Brexit. Therefore, European firms operating in the UK will have time to prepare for and submit applications for UK authorisation and complete any necessary restructuring. The UK government also intends that firms that do not wish to continue to enter into new business in the UK after Brexit should have a legal framework in which they can run off business entered into pre-Brexit.
Temporary permissions regime for firms wishing to continue their business in the UK
- Transitional provisions have been implemented in the United Kingdom under The EEA Passport Rights (Amendment, etc., and Transitional Provisions) (EU Exit) Regulations 2018, which will come into force on the date of a no-deal Brexit.
- Under this legislation, there is a temporary permissions regime (the TPR) for EEA-authorised insurers and insurance intermediaries that want to continue their UK business after a no-deal Brexit.
- To enter the TPR, EEA-authorised insurers must have notified the PRA on or before 12 April 2019, however for authorised insurance intermediaries the deadline for notifying the FCA is currently 30 October 2019. In addition, any EEA firm which has submitted a pending application for UK authorisation at any time before a no-deal Brexit will automatically enter into the TPR.
- Under the TPR firms will have a deemed permission to carry on insurance activities in the UK for a maximum of 3 years, during which time their applications for full UK authorisation will be determined. While they are in the TPR, EEA firms will be subject to supervision by the FCA, and (for insurers) the PRA and FCA.
- To obtain UK authorisation they will need to demonstrate that they meet UK regulators' threshold conditions. Insurers will need to be able to comply with third country branch requirements equivalent to those which apply to a third country branch insurer in the EU, including the calculation of a branch SCR and MCR, and localisation and deposit of assets.
Run-off regime for firms who will enter into new business after a no-deal Brexit
- EEA-authorised firms who do not wish to enter the TPR, or do not obtain UK authorisation through an application process while in the TPR, will be subject to the Financial Services Contracts Regime (FSCR) which provides firms with the necessary permissions to service their pre-existing contracts for a period of 15 years from exit day, to allow for an orderly wind down of their UK regulated activities. They will not be able to enter into new business in the FSCR.
- Insurance and insurance intermediary firms which are currently passporting into the UK and have not notified their intention to enter the TPR within time, or commenced and application for authorisation, will automatically be entered into the FSCR.
EIOPA's recommendations – February 2019
On 19 February 2019 EIOPA, the EU's supervisory authority responsible for the insurance sector across the member states, published its recommendations for continuing member states in the light of the UK withdrawing from the EU. EIOPA expects each member state to develop "a legal framework or mechanism to facilitate the orderly run-off of business which [becomes] unauthorised" following a no-deal Brexit.
EIOPA said that UK insurance undertakings could seek authorisation to carry out insurance business through a branch in a member state, to ensure that they could continue to service business in that member state (under the provisions in Solvency II applying to branches in the EU of third country insurers). Such an authorisation would not of course allow a UK insurer to underwrite risks in member states other than the one in which the branch is authorised. EIOPA said that member states' authorities should apply the principle of proportionality to applications for authorisation and take into account that the UK insurance undertaking was subject to Solvency II requirements before Brexit. However, if member states were considering accelerating the authorisation procedure for UK insurers they should consider restricting authorisation to the run off of existing business.
EIOPA also said that authorities in continuing member states should allow the finalisation of portfolio transfers from UK insurance undertakings to insurance undertakings in continuing member states, provided that they were initiated before the UK's withdrawal. This recommendation will be welcomed by any UK insurers, for example Lloyd's, who have commenced portfolio transfers to EU risk carriers which are unlikely to be approved before Brexit, if it happens on 31 October 2019.
For UK intermediaries wishing to continue or commence distribution activity in respect of risks or policyholders in continuing EU countries, EIOPA's recommendation was that member states' authorities should ensure that they did so through legal entities established and registered in the EU, demonstrating an appropriate level of corporate substance, and meeting the professional and organisational requirements of the Insurance Distribution Directive.
Importantly, EIOPA's recommendations were not prescriptive. It has been left for each continuing member state to decide what framework to put in place. So, for example, the time period (if any) during which UK firms would be able to continue to run off policies entered into before Brexit could vary significantly between different EU markets.
In the following sections of this guide we consider no deal regimes that are being put in place in individual member states to allow UK insurers and insurance intermediaries to run off their pre-Brexit business. Authorisation of new insurers or intermediaries, or of third country branches, in continuing EU member states is outside the scope of this guide, but DLA Piper's insurance team can advise on such matters.
- Austria has not yet passed any legislation specifically relating to insurance activities in the event of a no-deal Brexit.
- Under current law, in the event of a no-deal Brexit, UK-authorised insurers and insurance intermediaries will be required to terminate their insurance agreements with Austrian customers as soon as possible (Article 12 of the Austrian Insurance Supervision Act 2016).
- It is not yet clear whether parties will be able to fulfil their contractual obligations (e.g. payment of premium or claims) before an agreement is terminated.
- UK-authorised insurers and insurance intermediaries will be unable to conclude new agreements or renew existing agreements.
- Under Article 20 of the Brexit Act of 3 April 2019, the Belgian government and the national regulators can implement measures to ensure the performance of insurance agreements in the event of a no-deal Brexit.
- The aim of these measures is to allow insurance agreements entered into before a no-deal Brexit to be performed, but no new insurance agreements would be permitted.
- These measures may give UK-authorised insurers temporary permissions to run off their business in Belgium.
- These measures will only come into force if and when the government adopts a royal decree to that effect.
- Transitional provisions have been implemented in France by Ordinance No. 2019-75 of 6 February 2019.
- If there is a no-deal Brexit, UK-authorised insurers will no longer be able to renew direct insurance contracts or enter into new direct insurance contracts; however, UK-authorised insurers will be able to collect premiums and pay claims under any insurance contracts concluded before Brexit. Reinsurance business is not covered by this Ordinance.
- Under article L. 310-2-3 III of the French Insurance Code, UK-authorised insurers are required to provide information to policyholders notifying them of the fact that they will no longer be authorised to conduct insurance business in France.
- UK-authorised insurance intermediaries will no longer be able to conduct business on behalf of insurers following a no-deal Brexit.
- Transitional provisions were implemented in Germany on 29 March 2019 under section 66a of the German Insurance Supervisory Act.
- BaFin will be authorised to allow UK-authorised insurance companies to operate in Germany for a transitional period of 21 months following a no-deal Brexit.
- During this period, UK-authorised insurance companies must run off existing insurance contracts or transfer them to an EEA-authorised insurer. UK-authorised insurers cannot write any new policies or renewals during this period.
- For UK-authorised insurance intermediaries, no transitional period has yet been implemented. Unless this changes, they will not be allowed to provide insurance mediation services in Germany after a no-deal Brexit.
- Transitional provisions were implemented in Italy by Law 41 of 20 May 2019.
- In the event of a no-deal Brexit, UK-authorised insurers will no longer be able to enter into new insurance contracts or renew existing contracts; however, during the 18-month transitional period they will be able perform their obligations under contracts in place prior to a no-deal Brexit.
- UK-authorised insurers are required to keep the Italian regulator, IVASS, informed of their plans to run off existing business in Italy.
- In the event of a no-deal Brexit, UK-authorised insurance intermediaries will no longer be able to conduct business in Italy; however, during a six-month transitional period they will have permission to conduct activities necessary for the orderly termination of existing distribution relationships.
- Luxembourg has passed legislation which is intended to address the consequences of a no-deal Brexit.
- By a law dated 8 April 2019, the Luxembourg regulator (the Commissariat aux Assurances, (CAA)) can take measures to ensure the proper functioning and stability of financial markets and protection of policyholders in the event of a no-deal Brexit.
- The CAA has the power to exempt UK-authorised insurers and reinsurers from regulatory requirements for a maximum period of 21 months from the date of Brexit. The exemption will only apply to contracts concluded before Brexit or concluded or renewed after the date of Brexit if they are closely linked to contracts existing at the time of Brexit.
- No similar legislation has been adopted in relation to UK-authorised insurance intermediaries.
- The Netherlands has not yet passed transitional legislation specifically relating to insurance activities in the event of a no-deal Brexit.
- However, the Netherlands has adopted a collective Act (the Collective Brexit Act) amending certain laws and creating provisions for a no-deal Brexit, which will be brought into effect by royal decree.
- The Collective Brexit Act does not specifically mention UK-authorised insurers and insurance intermediaries, but it is intended to prevent unacceptable consequences for businesses and citizens in connection with a no-deal Brexit.
- The Collective Brexit Act will allow for the implementation of temporary measures in the event of unforeseen and unexpected results of Brexit.
- Transitional provisions in Poland will enter into force on the date of a no-deal Brexit.
- The no-deal legislation sets out transitional periods of between 6 and 24 months, depending on the activities carried out.
- For life insurance contracts underwritten by UK-authorised insurers before a no-deal Brexit, the maximum period is 24 months. For non-life contracts the transitional period is 12 months. These periods are intended to facilitate a run-off or transfer of the relevant portfolio. During the transitional periods insurers will not be able to conclude new insurance agreements or renew or amend existing agreements.
- Under the new rules it will also be possible for UK-authorised insurers and reinsurers to continue conducting reinsurance business for a period of two years.
- Transitional provisions under Part 8 of the Withdrawal of the United Kingdom from the European Union (Consequential Provisions) Act 2019 will come into force in the Republic of Ireland in the event of a no-deal Brexit.
- There will be a three-year run-off regime, which, subject to a number of conditions, will allow UK-authorised insurers and intermediaries to continue to service their existing Irish customers in order to run off the business.
- UK firms will no longer be able to write new insurance contracts or continue insurance distribution in respect of new insurance contracts in Ireland unless they obtain authorisation in Ireland.
- Some of the provisions have been criticised as ambiguous, for example, it is not clear what exactly constitutes new business.
- Transitional provisions have been implemented in Spain under Royal Decree-Law 5/2019 of 1 March 2019 and will come into force on the date of a no-deal Brexit.
- UK-authorised insurers and insurance intermediaries will lose passporting rights, but contracts already in force will continue in force during a run-off period of nine months.
- Neither renewals of existing contracts nor amendments to essential conditions of such existing contracts will be possible during the run-off period.
- UK-authorised entities are expected to use this nine-month period to reorganise their activities and/or insurance portfolios and/or obtain authorisation in Spain.
- EIOPA Recommendations for the insurance sector in light of the United Kingdom withdrawing from the European Union (in English)
- The Brexit Act 2019 (not available in English)
- Austrian Insurance Supervision Act 2016 (in English)
- Brexit Statement from the FMA (not available in English)
- Brexit Statement from the FMA (not available in English)
- “Brexit” Act of 3 April 2019 on the withdrawal of the United Kingdom from the European Union (not available in English)
- Ordinance No. 2019-75 of February 6, 2019, on Preparatory Measures for the Withdrawal of the United Kingdom from the European Union in Financial Services (not available in English)
- “Brexit” Act No. 2019-75 of February 6, 2019, on Preparatory Measures for the Withdrawal of the United Kingdom from the European Union in Financial Services (not available in English)
Law of 8th April 2019 on measures to be taken in relation to the financial sector in the event of the withdrawal of the United Kingdom of Great Britain and Northern Ireland from the European Union:
- Law of 27 March 2019 amending certain laws and making provisions in connection with the United Kingdom's withdrawal from the European Union (Brexit Compilation Act) (not available in English)
- Act of 19 July 2019 on the transitional period referred to in the Agreement on the withdrawal of the United Kingdom of Great Britain and Northern Ireland from the European Union and the European Atomic Energy Community (not available in English)
Republic of Ireland
- Withdrawal of the United Kingdom from the European Union (Consequential Provisions) Act 2019 (in English)
- Royal Decree-Law 5/2019, of March 1, which adopts contingency measures before the withdrawal of the United Kingdom from Great Britain and Northern Ireland from the European Union without reaching the agreement provided for in Article 50 of the Treaty on European Union (not available in English)
Temporary Permissions Regime
- The EEA Passport Rights (Amendment, etc., and Transitional Provisions) (EU Exit) Regulations 2018
- PRA Guidance on the TPR
- FCA Guidance on the TPR
Financial Services Contracts Regime