Brexit delay prolongs uncertainty for insurers
Yesterday's announcement of Halloween as the new deadline for Brexit will prolong uncertainty for many UK insurers.
While the delay of a possible hard Brexit and consequent loss of passporting rights will be met with relief by many, the uncertainty over the final outcome of Brexit (and the existence and duration of any interim arrangements) looks likely to continue for the foreseeable future.
A number of insurers have already completed Brexit restructuring projects to guard against the risk of lost passporting rights – including Part VII transfers of existing portfolios of European business to existing or newly formed European subsidiaries. These Part VII transfers have been endorsed by regulators and the courts as prudent precautions to take.
However, other insurers have delayed implementing Brexit contingency plans until the political outcome of Brexit becomes clearer. Those insurers have sought to weigh the substantial costs of carrying out a Part VII transfer and/or establishing an EU subsidiary against the risk of not being able to administer European policies after Brexit. The desire to avoid significant unnecessary expense (which would ultimately be borne by policyholders) is entirely understandable - especially when you consider that as long ago as March 2018 both the EU and UK stated that transitional measures would be put in place until at least December 2020, by which point the future trading relationship would have been agreed. Those earlier statements can no longer be relied on, but it remains a possibility that passporting rights, or another form of mutual market access arrangement, will be retained as part of any future trade relationship between the UK and the EU. It also remains a possibility that Brexit will never take effect.
Yet the possibility of a hard Brexit also remains a possibility, not least if there is a change of leadership within the Conservative party. And however large or small that possibility, the consequence for UK insurers would be of fundamental significance – the risk of no longer being able to administer existing European policies legally or write new European risks.
To add further confusion to the mix, EIOPA issued guidance in February encouraging national legislators to look kindly upon UK insurers running-off portfolios of European insurance business (effectively reversing some of EIOPA's previous statements on this point). This has led to legislation and regulatory announcements in many EU member states providing that UK insurers may continue to service existing insurance business in their jurisdiction for a transitional period.
For example, the Republic of Ireland (the European economy which many believe has the most to lose from a cliff-edge Brexit) has prepared wide ranging legislation intended to soften the effects of any hard Brexit. Part of that legislation provides for UK insurers to be able to continue to administer run-off policies for a period of three years following Brexit day. However, well-meaning as this is, it is a small part of a very large package of legislation, and is somewhat lacking in detail. Some uncertainty exists as to how it would be applied in practice – for example, would amendments to existing policy terms be allowed?
So the decision whether to implement a Brexit restructuring project involves the consideration of a myriad of legal, political and operational factors. Yet in the absence of any certainty, we can expect many insurers to proceed with expensive Brexit projects. Recent court decisions have confirmed that Brexit Part VII transfers can still be justified notwithstanding the implementation of national transitional legislation. One of the interesting and unintended side effects of Brexit is that it has spawned a great deal of case law and judicial commentary on Part VII transfers, an area of law which had not previously developed at a lightning pace. However, such legal niceties will be of little comfort to insurers who continue to find themselves in a state of Brexit uncertainty.