Brexit will impact the law affecting the insurance market in the areas of regulation, underwriting, policy wordings and claims issues.
The freedom to provide insurance and reinsurance services from one member state into another member state stems from the EU Insurance Directives and the Reinsurance Directive (all now replaced by the Solvency II Directive) and the Insurance Mediation Directive. These provide that if an insurer or intermediary is authorised to carry on insurance or mediation activities in the member state where it has its head office, that authorisation is valid for the whole of the EU. There are similar but not identical arrangements in place with countries in the EEA.
These rules allow international insurance and broking groups to trade in the EU from a subsidiary authorised in the UK. The exercise of this right is called "passporting".
In theory, passporting into the EU from a UK authorised insurer or intermediary will no longer be possible following Brexit unless the UK becomes part of the EEA or bilateral arrangements are negotiated, such as those currently enjoyed by Switzerland in relation to establishing a branch operation by insurers. If such reciprocal arrangements are not agreed then in order to continue trading in the EU, insurers and brokers will have to establish authorised subsidiaries in an EU member state and obtain regulatory approval.
The main focus of the regulation of insurance business in the UK is on the solvency of insurance companies and the integrity and competence of their senior management and controllers.
The EU Solvency II Directive, which involved a wide-ranging reform of the EU insurance solvency regime, was implemented in January 2016 so is now part of UK law. Another major piece of EU legislation affecting the insurance sector is the Insurance Distribution Directive (IDD). IDD came into force on 22 February 2016 and member states have two years in which to transpose it into national law. Although the referendum took place before implementation of IDD by member states in 2018, Brexit is likely to take place later than the deadline for implementation of IDD into national law.
The UK will no longer have to comply with Solvency II; however the FCA and PRA have already implemented Solvency II requirements and UK regulators have been involved with and influential upon the design of the Directive, so it is likely that a similarly high standard of regulation will continue in the UK. This is particularly the case as the UK would wish to be granted regulatory equivalence so that UK authorised insurers could benefit from the advantages under Solvency II that this brings to third-country insurers.
An example of the effect that EU legislation can have on new lines of business is the EU-wide changes which are to be brought about by the EU General Data Protection Regulation (GDPR) and the EU Network and Information Security Directive (NISD). The GDPR applies from 25 May 2018 and the NISD is also expected to be implemented within about two years. These pieces of legislation respectively require the mandatory reporting of personal data breaches and cyber security incidents for certain industries. Both of these developments are likely to increase the uptake of cyber policies and will also provide better data to enable more accurate pricing of cyber risks.
Following Brexit, will the UK still mandate this level of reporting, which indirectly benefits the cyber insurance market? Possibly not if the UK decides that the regimes are too burdensome.
In certain areas, such as health and safety and environmental reforms, EU regulation benefits liability insurers by helping to improve risk management, which in turn reduces the frequency or severity of claims. For example, much UK environmental law depends on EU regulations that are currently directly effective.
Policy wording and claims issues
Insurance contract law in England is not governed by EU law but has been shaped by UK derived law, such as the Marine Insurance Act 1906, the Insurance Act 2015 (coming into force in August 2016) and the Consumer Insurance (Disclosure and Representations) Act 2012, so no changes to these regimes will be expected after Brexit.
Just as with other disputes governed by English law and jurisdiction, insurance disputes will be affected by the impact of Brexit on the issues around governing law, jurisdiction, parallel proceedings, service of proceedings out of the jurisdiction and recognition and enforcement of judgments.
In addition, there is an insurance exception to the general rule under the Recast Brussels Regulation that only affects the insurer/insured relationship. This means that the insured has the option of bringing proceedings in his own domicile and the insurer is restricted to suing the insured in the insured's country of domicile. The ability to circumvent the rules by a jurisdiction agreement is very limited, as the rules are there to protect the customer who is seen to be in a weaker position.
Following Brexit, where the Recast Brussels Regulation will no longer apply, the English court is likely to uphold express clauses between the parties conferring jurisdiction on the English courts. However, the question of how other EU member states will view such clauses, which will be a matter for the laws of those member states, could give rise to considerable uncertainty. It may be prudent for insurers to follow the provisions in the Recast Brussels Regulation anyway (and write them into the policy) in order to be seen to be treating customers fairly under FCA principles.