Brexit: Hard or soft, insurers need to act now
11 Sep 2017
While the likelihood of a hard Brexit may have reduced somewhat in the light of the election result, UK insurers undertaking business in other EU countries (whether through Freedom of Establishment, Freedom of Services or as an established branch) face a predicament as to the basis of those operations after Brexit.
A surprisingly large number of UK life insurers have permissions to operate in other EU states. Although many of these permissions will simply reflect the residence of expatriate UK policyholders, there are, equally, a number that transact meaningful amounts of new business. In both cases, firms will need to consider their ability to service current policyholders and, in the latter case, how to maintain the economic value of the current new business production capability.
There is a growing level of industry activity to address the issues raised.
What are the options?
The most obvious solution is to consider relocating or re-organising the business undertaken into an entity in another EU state.
One way to achieve relocation is for a company to re-register via the Societas Euriopaea process, although this is really only useful if the firm does not transact business in the UK since the post-Brexit position of non-UK insurers operating in the UK is equally uncertain. Once registered as such an entity, we understand it is a relatively simple process to relocate. However, although a firm’s authorisation would not be lost on re-registering, it is probable that re-authorisation would still be required by the new home state regulator on actual relocation. Adopting this approach avoids the need for a transfer of business to be pursued but it is an untested process and no doubt, challenges regarding conduct of business and customer protection would still need to be satisfied.*
A more tried and tested approach is to consolidate the non-UK business into an authorised entity in an appropriate EU state.This would be achieved via the Part VII Insurance Business Transfer process through the UK Court. Currently, the Part VII process would result in an effective transfer of EU business on a cross-border basis, reflecting the provisions of the Solvency II Directive to permit transfers. Of course, for the Part VII process to work there needs to be an authorised entity in the chosen location. If there is an existing EU insurance firm within the group, then this may be a defining condition in establishing the location for the transferring business. If there is no existing, conveniently located insurance company, then a newly authorised firm will be required. If the transfer is not completed by the date of Brexit, it is far from clear whether the Part VII process would still be effective in transferring the non-UK business since this will depend on the Brexit terms, around which there are as yet no details, let alone certainty.
With only 18 months until Brexit becomes a reality from March 2019, it will be challenging for firms to conduct both a Part VII and achieve authorisation of a new company in that timescale, not just in respect of the internal resourcing requirements but also with the potential for significant congestion in the regulatory and court timetables
We have considered the perspective of a UK insurer, but non-UK insurers writing business in the UK from another EU state will have similar challenges and uncertainties, albeit in the opposite direction.
A clear and simple message emerges that firms operating cross-border from or into the UK cannot afford to wait until Brexit has happened: action is required now.
How can we help?
At Hymans Robertson, we have an experienced team of life actuaries who can help you implement your chosen solution:
- Support in the development plans and submission of the business plans required for a new authorisation,
- Support in implementing a Part VII transfer, or, alternatively, acting as the Independent Expert reporting on the terms of a proposed transfer.
* This summary is a simplified, actuarial take on this approach: we advise you to take appropriate legal advice to get the full picture.