As widespread uncertainty, confusion and an overall lack of clarity continues to underpin the UK’s departure from the European Union (EU), international financial services ratings agency, A.M. Best, has said that whatever the outcome, UK-rated insurers are generally well prepared for Brexit.
Exactly when the UK is to leave the EU and under what terms remains a mystery, despite many, many months of negotiations. Recently, UK Parliament voted in favour of seeking an extension to article 50, which if approved by the government and the EU, would see the UK leave the EU sometime after the initial March 29th Brexit date.
At the same time, MPs also voted to reject a no-deal Brexit scenario under any circumstances, which, although sounding somewhat promising, fails to provide any clarity for what Brexit might actually look like once the UK does eventually depart the EU.
According to A.M. Best, despite the fact that insurance and reinsurance companies have welcomed the no-deal rejection vote and potential extension of article 50, the industry remains frustrated that the terms of the UK’s withdrawal from the EU are still not agreed.
“Nevertheless, AM Best notes that, regardless of when or under what terms the UK leaves the EU, rated UK-domiciled insurers are generally well prepared,” says the ratings agency.
One of the main Brexit issues for insurers and reinsurers concerns passporting rights, which essentially enable companies domiciled in an EU country to operate freely in another EU member state.
Once the UK does leave the EU, passporting rights that exist between the UK and the European Economic Area (EEA) are expected to cease, meaning UK-based insurers and reinsurers will no longer be able to issue policies in the EEA.
Furthermore, should the UK leave the EU absent a trade deal encompassing the country’s significantly important but seemingly somewhat overlooked financial services sector, UK domiciled firms will also not be able to service any existing contracts in certain EEA countries by settling and paying claims.
“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, which will allow EEA insurers to operate in the UK for a maximum of three years post Brexit while they seek authorisation from UK regulators,” explains A.M. Best.
As well as the UK government’s Temporary Permissions Regime, and ever since the referendum in 2016, the large majority of UK insurers and reinsurers that underwrite in the EEA have taken steps to ensure continuity post-Brexit, driven in part by the severe lack of clarity.
Most notably, companies have established new branches in remaining EU domiciles, ultimately ensuring they can continue to operate and serve their clients regardless of both the timing and terms of Brexit. While smaller companies, which lack the ability to launch new EU branches, have been forming partnerships with local carriers that will be able to front for them, explains A.M. Best.
“AM Best notes that those rated insurance groups affected by Brexit, that intend to continue to underwrite EEA business, have ensured that they will have these arrangements in place before March 29, 2019.”
Despite the costly and timely efforts of UK re/insurers, small and large, A.M. Best warns that fronting arrangement and the establishment of new subsidiaries does not address the issue that a UK firm might find that is unable to service EEA contracts following a loss of passporting rights.
However, the large majority of rated players have responded to this challenge by either completing, or initiating a transfer of their EEA business from the UK to an affiliated EEA insurer, which comes under Part VII of the Financial Services and Market Act 2000.
But again, the Part VII transfer is both costly and time consuming, meaning that a number of these will likely not be finalised before Brexit, although it does still remain uncertain exactly when that will be.
“In view of this, affected companies have welcomed announcements by HM Treasury in the UK and the European Insurance and Occupational Pensions Authority (EIOPA), which support the orderly run-off of insurance business if there is no withdrawal agreement between the UK and the EU,” explains the ratings agency.
Adding: “In further support of the orderly run-off of existing EU business by UK insurers, AM Best notes the announcements made by a number of European countries, including France and Germany, that new rules will be put in place to allow claims to be paid by UK insurers post-Brexit.”
The UK’s financial services industry is extremely important to its economy, and as such it’s been somewhat surprising that still, with potentially just weeks to go, there remains more uncertainty than certainty about both the timing and terms of Brexit.
But in spite of this, and testament to the willingness and ability of UK insurers and reinsurers, the majority of those that will be affected by Brexit have taken steps to ensure continuity for clients in a post-Brexit world.