The Brexit Clock Is Ticking

With 9 days left for Brexit, Nigel Feetham writes about Brexit contingency planning for U.K. and Gibraltar insurers.

U.K. and Gibraltar insurers should now have implemented, or be in the process of implementing their Brexit contingency plans. There are five potential scenarios.

The first is a portfolio transfer of EU insurance liabilities to an EU insurer (as transferee). This would then enable the U.K. or Gibraltar insurer to focus on their U.K. (and international) business whilst allowing existing EU policyholder claims to be paid through the EU insurer. Of course, portfolio transfers are expensive to execute (you have legal, regulatory, actuarial and other business costs associated with the process such as newspaper advertising and publicity requirements) and can take a substantial amount of time to complete (due to regulatory and policyholder consultation periods, together, in cases where court approval is required, of obtaining the directions and sanctions court hearing dates). EIOPA have helpfully published recommendations supporting the process, permitting portfolio transfers that have been initiated prior to Brexit to be completed.

However, some of the smaller insurers may not have the financial resources necessary to undergo a portfolio transfer. Transferring books of business is not just costly from a process perspective, but would also require assets and reserves supporting those insurance liabilities to move across and therefore the transaction must have a willing buyer.

The second scenario is a redomicilation. In other words, ‘moving’ the company to another European Member State. You can achieve this through a merger (in the case of a UK company), or redomiciling the company (in the case of a Gibraltar company). The latter process involves an insurance licence application to an EEA state regulator, can therefore also take a substantial amount of time, and is only suitable for companies that undertake EU business. The process can obviously be disruptive since it requires a change of management and board composition, but is also dependent on the EU Regulator granting the insurance licence, which it could do subject to conditions, or even decline as the case may be.

The third scenario is setting up a new licensed insurer in the EU but this requires separate capitalisation and a portfolio transfer from the UK/Gibraltar insurer of its EU liabilities and is therefore subject to the same limitations as scenario 1 and 2.

Where does it leave insurance companies that cannot undergo any of these scenarios (1, 2, or 3)? Under the last potential scenario, EIOPA have requested EEA Regulators to implement a transition period for the payment of existing insurance claims in the case of a ‘no-Brexit deal’. Each EU Member State has announced, or is in the process of announcing, their own ‘no-deal’ Brexit measures. The transition periods I have seen so far range from 9 to 24 months. The question on the 29 March will be, what happens after the end of that transition? UK and Gibraltar insurers with longer tail liabilities will obviously be hoping for further extensions, and in the case of smaller entities who may not have the financial resources for separate capital requirements in each EU territory for these books in run-off, without the need to establish fully licensed branches. Unless the EU recognises Solvency 2 ‘equivalence’ of the UK/Gibraltar regulatory regime and applies proportionality to allow an orderly run-off in full, how else could existing claims be paid and insurers continue to service existing claimants?

Nigel Feetham is a partner of Hassans