January 31, 2020

Brexit and the insurance industry - what happens next?

We consider what could happen next for the insurance industry as the Brexit transition period begins.

Little, if anything, will change for the insurance industry as a result of the UK's withdrawal from the institutions of the European Union on 31 January 2020. It will be pretty much business as usual during the Brexit transition period and attention will focus on the details of the future trade deal that is due to come into force next year. There is limited expectation that passporting rights will be maintained under a freedom of service agreement but hope that market access arrangements based on equivalence will be agreed quickly.

However, this is not a cause for concern. The London market has been fully preparing for a hard Brexit scenario and the vast majority of UK carriers have set up subsidiaries in the EU location they believe best supports their business and their clients’ interests going forward. These subsidiaries have already begun renewing 2020 business, so the insurance industry is well prepared for the post-Brexit world. That is not to say that there won’t be teething problems.

Potential issues for the insurance industry

Will it be perfect, will there be exceptions, unresolved issues?

It remains to be seen how well the market will work, how brokers will interact with some of the new carriers, global policies etc.

Regulators will be on the front foot and it will take time for things to bed down.

The most likely areas for concern are in personal lines, motor and the reinsurance markets.

In personal lines and motor policies there are potential regulatory blind spots and points of tension post-Brexit. For example, EU member states may consider payment of claims or benefits on a cross-border basis as a regulated activity. There is also concern regarding certain covers included in insurance policies provided in the UK but delivered by EU insurers, for example assistance and legal expenses insurance. EIOPA has provided non-binding guidance on how business should be conducted, but there is already evidence that the French and German regulators may decide their own course of action.

Even if there are no longer passporting rights after Brexit, having equivalence will be very helpful especially from a reinsurance perspective and in particular intra-group reinsurance arrangements. This would require legal ratification by each of the 27 EU member parliaments. Evidence from Bermuda, Japan and Canada suggests this process may some time, although as the UK and the EU are one and the same in terms of equivalence this, one would hope, will make the process much quicker post-Brexit. 

Moving forward with a Brexit trade deal

As the year progresses, we are likely to see much speculation about progress and timing of a new trade deal between the UK and EU. It seems unlikely that the insurance industry's concerns are going to be top of any government agenda. Even if trade in services were to be prioritised more broadly, a plan would need to be put forward for consideration and discussion by July 2020 before governments’ and legislatures’ summer recess. Any final proposals would then need to be re-presented in September to allow sufficient time for parliamentary processes to complete before the new trade deal could be passed into law in all 28 countries (EU27 + UK) by official Brexit on December 31 2020.

Perhaps the final concern is regarding jurisdiction. Parties with EU-related disputes on their hands may have to act quickly to benefit from the special rules that will operate during the Brexit Transition Period through to December 2020. Court guidance suggests it may be necessary to commence proceedings suddenly where delay "might prompt forum shopping in other jurisdictions" but also that there will be flexibility. Companies in the insurance industry should take advantage of these arrangements while they can before Brexit hits.