We are now in the final few weeks before the United Kingdom is due to leave the European Union. If the UK leaves the EU without a transitional period or agreed withdrawal terms, ie on ‘hard’ Brexit terms, at the end of March the UK will be abruptly removed from the regulatory ‘passporting’ framework that allows insurance contracts to be entered into and serviced on a cross-border basis.
The UK regulators have been open in communicating about their preparations to ensure continuity of insurance contracts and protection of policyholders if there is a ‘hard’ Brexit. In this article we take a look at how a number of European Member States have similarly been planning for a hard Brexit scenario, in particular in terms of contract continuity and how insurers may service existing insurance contracts.
Pan-European view: EIOPA recommendations
As the supranational European insurance regulator, the European Insurance and Occupational Pensions Authority (EIOPA) is empowered to give directions and guidance to national regulators under legislation such as the Solvency II Directive, and is generally mandated to issue guidelines and recommendations to promote the safety and soundness of markets, and the convergence of regulatory practice.
In this capacity, on 19 February 2019, EIOPA produced a series of recommendations addressed to EU insurance regulators preparing for a hard Brexit. These recommendations set a general objective of aiming to minimise detriment to policyholders. In support of this objective:
- EIOPA recommended that competent authorities should apply a legal framework to facilitate an orderly run-off of insurance business which would become unauthorised after Brexit, or to facilitate authorisation of new legal entities
- EIOPA suggested that the finalisation of portfolio transfers should be permitted where they were initiated by UK insurers before the withdrawal date
- In relation to life insurance, EIOPA recommended that where a policyholder with a habitual residence in the UK takes out such insurance with a UK insurer and subsequently moves their habitual residence to an EU Member State, EU insurance regulators should take into account that the policy was taken out in the UK and the UK insurer did not provide cross-border services for this contract
- In addition, EIOPA recommended that UK insurers with cross-border business should be reminded of the requirement to disclose to policyholders and beneficiaries any changes to their rights and obligations after Brexit.
UK - no deal preparations
The Financial Services Contracts (Transitional and Saving Provision) (EU Exit) Regulations 2019 (the “FSCR”) provides a ‘run-off’ mechanism by which firms authorised in EU Member States may continue to service (inter alia) contracts of insurance in the UK after Brexit. The FSCR will apply to firms which either do not make a notification under the Temporary Permissions Regime (the “TPR”), or firms which do make a notification but subsequently do not obtain full UK authorisation. It allows those firms to take certain actions limited to necessary regulated activities. These include activities which are necessary:
- for the performance of a contract entered into before exit
- to transfer property, rights or liabilities under a preexisting contract, or
- to undertake certain activities in relation to managing financial risk.
The FSCR will be time limited depending on the type of regulated activity being performed. For insurance contracts it will apply for a maximum of 15 years. The FSCR came into force on 1 March 2019.
EU Member States – No deal preparations
Colleagues from law firms across a number of Member States have contributed the brief summaries set out below. As you will appreciate, the legal position is subject to rapid change. It is imperative that, if the need arises, up to date advice specific to the relevant EU Member State is obtained.
Germany
The German Parliament (Deutscher Bundestag) has adopted preliminary provisions to protect German policyholders insured by UK insurers. The new regulation will permit the German Federal Financial Supervisory Authority (BaFin) to grant a transitional arrangement for 21 months after Brexit. During this transitional period, UK insurers can continue to cancel and settle insurance contracts. UK insurers that have no authorised subsidiary in the EU will not be permitted to underwrite new business under the new provisions.
(contributed by Wilhelm Partnerschaft von Rechtsanwälten mbB)
Italy
The Italian local Supervisory Authority (IVASS) reported that only two thirds of UK insurers operating in Italy have completed contingency plans to manage the effects of Brexit. The Italian Government is in the process of developing legislation to permit insurers certain temporary permissions, but the exact nature of these permissions is not yet understood.
(contributed by Nctm Studio Legale)
Sweden
On 21 June 2018 the Swedish Financial Supervisory Authority issued a report on the consequences of the UK leaving the EU without a deal. The report noted the issue of service continuity and stated that UK insurers can establish a Swedish branch and obtain the Swedish Financial Supervisory Authority’s authorisation to carry out insurance business in Sweden post-Brexit. Alternatively, UK insurers can transfer their Swedish portfolios to EEA-domiciled group companies and continue to service the customers by virtue of the freedom to provide services. Thus far, the Swedish Government has not adopted transitional provisions or other measures to maintain service continuity for UK insurers.
(contributed by Magnusson)
Poland
On 29 January 2019 the Polish Financial Supervision Authority (PSFA) published a general note on Brexit, warning that in the case of a hard Brexit, UK based entities operating in financial markets in Poland will have the status of a third-country entity. As expected, such entities would only be able to operate in the territory of Poland upon completion of appropriate proceedings before the PSFA (depending on the type of entity, this might involve e.g. the requirement to obtain appropriate permission from the PSFA) and such entities would be supervised to the extent specified in legislation. At the moment the PSFA is not proposing any approach to contract continuity in the event of hard Brexit in relation to financial companies based in the UK that provide cross-border financial services.
(contributed by TGC Corporate Lawyers)
Republic of Ireland
On 22 February 2019 the Irish Government published draft legislation: the ‘Withdrawal of the United Kingdom from the European Union (Consequential Provisions) Bill 2019’ (the Bill). The Bill provides a run-off mechanism for the servicing of insurance contracts if the insurer:
- is authorised in the UK or Gibraltar
- has exercised its right to carry on insurance business (or insurance intermediary business) in Ireland on a freedom of establishment / services basis
- has established a branch and commenced business in Ireland
- has ceased to write new business in Ireland
- is exclusively administering its Irish book of business in order to terminate its activity in Ireland, and
- complies with the general good requirements.
The Bill also provides for the Central Bank of Ireland to issue a “withdrawal notification” where it is satisfied that an entity is in breach of the legislation. If such hurdles are met, the UK insurer can continue to conduct its run-off activities in Ireland for three years following the UK’s exit in March 2019.
The Irish Government has stated that in recognition of the importance, breadth and scope of the Bill, the Government will work closely with all members of the parliament to ensure it passes through the houses of parliament in a timely fashion.
(contributed by William Fry)
Spain
On March 2, the Spanish Official Gazette published Royal Decree-Law 5/2019, of March 1, on contingency measures in respect of a withdrawal without an agreement by the United Kingdom from the European Union (the Contingency Regulations).
The Contingency Regulations state that insurance contracts concluded before the UK leaves the European Union by authorised insurers shall continue being effective after that date, and the parties’ obligations will be enforceable. The Contingency Regulations also state that such authorised insurers shall be permitted for a maximum period of 9 months to carry out ‘management activity’ with respect to contracts in force in order for the insurers to: (i) terminate the contracts; (ii) transfer the contracts to an authorised firm; or (iii) request authorisation from the regulator under the third country or other applicable regime.
This notwithstanding, the Contingency Regulations make it clear that UK and Gibraltar insurers will not in any case be permitted from the no-deal Brexit effective date to renew, or to novate insurance contracts where such novation entails the provision of new services in Spain or mean that parties’ essential obligations are affected, nor will they be permitted to conclude new contracts of insurance without authorisation as third country insurers.
Although its objective scope makes reference to “other financial services” in general, the Contingency Regulations do not contain any specific provision with respect to insurance distribution/intermediation activities carried out by UK or Gibraltar domiciled insurance intermediaries.
(contributed by Garrigues)
Portugal
No definitive or provisional measures have been put forth in Portugal to address the potential impacts of a no-deal Brexit on the insurance sector as of yet. The Portuguese Insurance and Pension Funds Supervisory Authority has clarified that, upon a hard Brexit, the UK is expected to become a third-country, leaving insurance companies headquartered in the UK without the right of freedom of establishment and to provide services, thus requiring them to transfer policies to an EU undertaking or to set up a local branch under the third-country regulatory framework to ensure business continuity.
The Portuguese regulator has also requested that both insurance undertakings and distributors headquartered in the UK with business in Portugal alert policyholders, insured persons, and beneficiaries to the potential impacts of Brexit, the contingency measures being adopted, and the continuity of insurance policies.
(contributed by Garrigues)
Summary
Notwithstanding EIOPA’s recommendation that EU Member States prepare a framework for the ordinarily run-off of insurance business in the event of a hard-Brexit, it is evident that the levels of preparedness of individual EU Member States varies. The ability of UK insurers to continue to service their EU cross-border business upon Brexit is therefore not consistent throughout the EU. Insurers should seek appropriate advice in the relevant jurisdiction should they have ongoing cross-border insurance business.
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