Brexit’s impact on insurance contracts

By Phillip K. Schulz, LL.M.
Attorney at law
Guidance – Head of Principles, Products & Legal
HDI Global SE

The United Kingdom formally exited the European Union on 31 January 2020. As both sides succeeded in agreeing on a withdrawal deal, the transition period came into force at that time. During the transition period, EU law is deemed to remain in force in the UK until 31 December 2020. It is, however, important to preview what might happen to your insurance contracts after this date.

As the Brexit deal failed to address numerous relevant issues of cross-border trade, both sides will continue to negotiate critical items in an effort to attaining agreement by the end of the year. However, it remains difficult to predict whether or not agreement will be reached within the transition period, especially where cross-border services are concerned. It therefore remains a matter of speculation whether solutions will be in place to protect service-driven industries such as the insurance sector by the year 2021. In this respect, insurers, reinsurers and insurance intermediaries all may face what effectively amounts to an unstructured or “hard” Brexit in the near future – even if the transition period is extended due to the coronavirus crisis.

At present, both the United Kingdom and the European Union fully benefit from the advantages of the Single Market. Such advantages include the conduct of cross-border trade without duties or quotas and a simplified customs procedure allowing for the free movement of goods while at the same time profiting from a greatly reduced administrative burden. Moreover, the four “European freedoms” – that is the free movement of goods, services and people as well as the freedom of establishment – have eliminated or reduced many barriers to free commerce within the European Union.

Upon expiration of the transition period at the end of the year, however, in the absence of a bilateral agreement between the United Kingdom and the European Union, the European freedoms will cease. As such, it may well be that barriers to free trade will rise again and render trade between the United Kingdom and the European Union more complicated and financially burdensome. Considering that seven of the United Kingdom’s most important export destinations and countries of origin for imports are EU member states, the United Kingdom must prepare for a difficult transition.

When considering the formidable disadvantages likely ensuing upon the end of the transition period, the financial services industry may be among those most severely affected. The insurance sector has profited enormously from the single passport principle, allowing insurers, reinsurers and intermediaries alike to conduct business EU-wide without the need to obtain local permission or establish a branch office in each EU member state.

In the event that no agreement is reached to preserve single passporting, both the conclusion of new business as well as the servicing of existing insurance contracts eventually may become difficult or even impossible. Moreover, a number of critical legal issues – such as contract continuity or the administration of insurance premium taxes – remain unclear, thus contributing to the overall legal uncertainty surrounding Brexit.

Although the European Union itself has remained remarkably indifferent to the plight of the insurance industry, both the United Kingdom as well as the EU27 member states have taken action to protect the cross-border business of insurers. In particular, national legislative measures have established transition periods during which insurers may either continue to conclude new insurance business or at least service their run-off business without the need of a local license. While it is unfortunate that the European Union’s lack of initiative has led to the emergence of numerous, differing transition regimes, the establishment of such transition periods nevertheless will prove enormously helpful to insurers on both sides of the English Channel.

The United Kingdom has enacted legislation which will benefit insurers domiciled in the EU27. More specifically, the EU Exit Regulations (no. 1149) passed Commons in 2018 establishing the so-called “temporary permissions regime” (TPR). Under the TPR, any insurer which has applied or intends to apply for local permission under Part 4A of the UK Financial Services and Markets Act may register as a “TPR insurer”. An EU27 insurer so registered will be deemed licensed until the UK Prudential Regulatory Authority has rendered a final decision on the respective license application. Where such a decision is rendered after the transition period expires, EU27 insurers will be able to conduct new business license-free even after expiration of the transition period.

Additionally, the United Kingdom created the “financial services contracts regime” (FSCR). It permits insurers domiciled in the EU27 acting without a license to service existing insurance business for a maximum period of 15 years – if the business was validly concluded on a freedom of services or TPR basis. The ability to service existing business and pay claims without regulatory complications will benefit insurers and their policyholders alike.

HDI Global SE has developed an action plan for managing the challenges of Brexit which will enable it to continue conducting business in the United Kingdom with minimal friction. Initially, HDI Global SE’s UK Branch Office has applied to the Prudential Regulation Authority for a third country branch license. Upon receiving permission, the UK Branch Office will be fully licensed to conduct business in the United Kingdom.

Additionally, HDI Global SE is registered as a TPR insurer. In this regard, HDI Global SE will benefit both from the transition period and the TPR. During this period, HDI Global SE will be able to alter its UK strategy, relying more heavily on the use of local policies in the United Kingdom. Such local business will be administered by the UK Branch Office in full compliance with UK regulatory law. Meanwhile, the FSCR will furnish HDI Global SE with a lengthy transition period in which it will run off any direct business not restructured to local business.

As Brexit is a highly dynamic and developing matter, HDI Global SE continues to monitor political and legal developments and will adapt its action plan as needed.