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BREXIT Impact on EU captives and insurers

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Following the decision by the U.K. to leave the European Union (EU), there is no certainty as to the impact this momentous decision will have on the financial services sector, certainly not until there is greater clarity around what any future new relationship between the U.K. and the E.U. might be. Notwithstanding the delay to any immediate triggering of Article 50, and the current political instability in the U.K., there remains a major question over how long in practice the new relationship of the U.K. with the E.U. will take to negotiate. Solvency II, for example, took more than 10 years to negotiate even though it related to a single industry segment. There is a two-year deadline for the U.K. leaving the E.U. once Article 50 of the Lisbon Treaty is triggered, if the negotiations with the E.U. have not by then been concluded. Negotiations with the E.U. could take less than two years, and provide for a shorter timeframe to exit. Therefore, captive owners and insurers have a maximum of two years from the triggering of Article 50 to formulate any contingency plan. PASSPORTING E.U. passporting allows insurers and captives that are authorised to provide financial services in one European Economic Area (EEA) jurisdiction to provide them in another EEA jurisdiction without the need for authorisation in that second jurisdiction. It achieves this by permitting the provision of cross-border services or the establishment of a physical presence through a branch office or agent. The key question for many captive owners and insurers throughout the U.K. must be, therefore, whether they will continue to enjoy the current ease of access into EEA markets. However, E.U. insurers are also faced with similar concerns as to how they will access the U.K. market, with the City of London being one of the world’s biggest insurance centres. The maintenance of access to European markets, in particular financial services, is a key objective for the U.K. in its negotiations, although certain E.U. leaders have already made objections to the U.K.’s wish to “cherry pick” particular options and benefits.

Best Case

  • Preservation of a similar cross-border regime by way of provision of services or establishment of a branch without triggering a requirement for direct regulatory authorisation in the host state.
  • This undoubtedly will require the maintenance of a Solvency II regime for those insurers wishing to access EU markets.

Worst Case

  • Full exit without ability to passport.
  • U.K. insurers will need to consider how they will continue to undertake E.U. business.

It’s not beyond the realm of possibility that a compromise will be reached, providing an arrangement that falls somewhere between the two extremes. It’s also reasonable to surmise that the best case and any alternative case would require the U.K. to operate an equivalent regulatory regime—i.e. the continuance of a Solvency II equivalent regulatory framework for insurers who wish to access the E.U. market. WHO MIGHT BE AFFECTED? Those affected, will be insurers and captives that are either:

  • U.K. or Gibraltar based, and are writing risks into other E.U. territories through the ‘passport’ provision as opposed to having a separate regulated entity in that jurisdiction; or
  • E.U. based captives and insurers writing U.K. or Gibraltar risks, without a separate U.K. regulated and capitalised entity.

GIBRALTAR – A SPECIAL CASE Gibraltar is a self-governing U.K. Overseas Territory. It has autonomy for its own internal affairs with the U.K. government retaining responsibility for defence, external affairs, and security. It is within the E.U., and complies with all applicable E.U. directives, by virtue of the fact that the Treaty of Rome applies to territories whose external affairs are the responsibility of a member state. Financial services firms are regulated by the Gibraltar Financial Services Commission meaning that, although not a full E.U. member state in its own right, the jurisdiction is distinct from the U.K. Therefore the ‘passport’ for insurance business into Europe is affected in the same way as for U.K. mainland located insurers. However, unlike the rest of Europe, Gibraltar’s passport into the U.K. would be unaffected as this is derived through the ‘bilateral’ Financial Services and Markets Act 2000 (Gibraltar) Order 2001. So, writing insurance business into the U.K. is not driven by any E.U. directive given that this refers only to passporting between member states. For insurers who are considering writing business into the U.K., Gibraltar therefore arguably offers a greater level of certainty compared to that provided by other E.U. jurisdictions, until such time as the results of the negotiations become clearer. Indeed, should the worst-case scenario unfold, Gibraltar could be well placed to facilitate access into the U.K. as a solution for those E.U. insurers without a presence in the U.K.. It might also stimulate some innovative regulatory changes that could offer captive owners an onshore location without the requirements of Solvency II equivalent regulation. WHAT SHOULD CAPTIVES AND INSURERS BE DOING? The position with regard to E.U. passporting is likely to create a period of significant uncertainty and debate, certainly until the likely outcome of the negotiations become clear. For the moment, captive owners and insurers need make no immediate decisions. However, Brexit is clearly a risk event for insurers, not just in terms of its effect on passporting, but also for the effect that the general uncertainty has had on financial markets, in turn affecting investments, long-term technical provisioning, and ultimately solvency assessments. Good governance requires that the risk event should be considered appropriately. With regard to passporting, it is worth captive owners looking now at their portfolio in terms of where the majority of their book is written and considering which of the following solutions might be appropriate should that worst case happen:

  • Arrange for another insurer to front the policies
  • Establish a subsidiary, branch, or ‘presence’ in that territory
  • Re-domicile the company (investigate if re-domiciliation legislation is in place)
  • Stop writing the line of business / into that territory

Whilst there is no need for any immediate decisions, contingency planning should work toward the maximum two-year timeframe. It is important to understand the resource requirements and timescales involved, in particular with regard to any licence application and legal process relating to establishing a branch or re-domiciliation. Regulatory process is notoriously protracted and therefore it is advisable to start looking into the implications of Brexit sooner rather than later.

 

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