Brexit

Insurance and Reinsurance

Why Ireland?

Brexit presents an unprecedented challenge for UK (re)insurers and intermediaries carrying on EEA cross-border business. It poses many questions and raises several issues which undertakings must now consider and address. 

In order for UK (re)insurers and intermediaries to continue exercising the rights conferred on them by EU legislation, it is likely that they will be required to relocate to an EEA jurisdiction. Ireland is an ideal location in this regard. First and foremost Ireland has committed to remaining a member of the EU post-Brexit.  The country has a responsive and responsible regulatory regime, a business-friendly open economy and a track record of encouraging foreign direct investment. Ireland has many other attributes that make it a desirable location to establish an EEA base post-Brexit:

  • A young, talented, well educated, and highly adaptable workforce
  • Membership of the EU
  • Status as the only English-speaking member of the Eurozone
  • A low corporate tax rate of 12.5%
  • A stable legal framework
  • A common law system
  • High quality State supports for new investments and innovation

The close relationship between the Irish and UK insurance markets, in addition to a broad range of other economic, cultural and regulatory advantages, mean many (re)insurers are considering an Irish authorised company to complement existing UK activities post-Brexit. 

Key Considerations

  1. Brexit negotiations:  The UK Government triggered Article 50 on the 29 March 2017. From that date, the UK and EU have a two year period to negotiate the UK's exit, although this time period can be extended. Until this two year period has elapsed the UK remains a member of the EU and UK (re)insurance undertakings retain rights conferred on them under EU legislation. The UK Government has already released a White Paper outlining their goals in Brexit negotiations (available here) and a similar document is expected from the EU a short time after Article 50 has been triggered. The deal which is ultimately negotiated by the parties will be of huge significance for (re)insurance undertakings and will look to resolve some of the issues outlined below.
  2. UK regulatory regime:  Due to the Great Repeal Bill the UK regulatory regime will be almost identical to that of the EU, at least in the short-term. If the UK wishes to be deemed an equivalent jurisdiction under Solvency II they will be unable to diverge significantly from the EU regime.
  3. Loss of passporting rights:  The Solvency II Directive provides that an EEA insurer’s home state authorisation to carry on business is valid for the entire EEA – the process whereby an insurer uses this authorisation to provide their services in another EEA Member State is known as "passporting." Once the UK exits the EU, it is likely that UK (re)insurance undertakings operating across the EEA on the basis of passporting rights will no longer be able to do so. The same issue may be faced by insurance intermediaries.  It is unclear whether (re)insurance undertakings authorised in EEA Member States who currently passport into the UK will be able to continue doing so, although there has been some suggestion that the UK Government may allow this arrangement to persist regardless of the outcome of Brexit negotiations.
  4. Equivalence:  As the UK will continue to transpose and apply EU law until the date of its exit and as it plans to enact a Great Repeal Bill thereby turning all non-transposed EU law into domestic law, the UK's regulatory regime will, at least in the short term, be very similar to the EU regime. This makes the UK a likely candidate for a favourable equivalence decision by the European Commission under the Solvency II Directive, although such a decision is ultimately at the discretion of the European Commission and political considerations will also play a major role. While equivalence would give UK (re)insurers some access to the Single Market (particularly in the case of reinsurers), it would be far more limited than the passporting rights which they currently enjoy. There are no equivalence provisions in the Insurance Mediation Directive (IMD), nor in the Insurance Distribution Directive (IDD) which will repeal and replace the IMD.
  5. Reinsurance issues:  As the UK is likely to achieve equivalence under Solvency II rules the reinsurance and retrocessionaire capacity available in Lloyds and the London market is likely to continue to be available to EU carriers and reinsurers. However, the UK would have to obtain the EU's agreement to arrive at this position – the mere fact that the UK regulatory landscape is similar to that of the EU's does not guarantee such a determination.
  6. Increased volatility:  It is likely that UK and EU markets will become increasingly volatile which will pose challenges for (re)insurers across Europe in terms of their capital position, investment portfolio and liquidity.
  7. Choosing the right location:  One of the key considerations would appear to be the substance of the establishment that the national supervisory authorities (NSAs) expect and the extent to which they will allow business to be written back to the UK. While the rules which the various NSAs follow are the same, they may be implemented differently in practice. Other considerations include language, taxes, availability of suitable real estate, level of Euroscepticism, employment law and talent of the workforce.
  8. Restructuring considerations:  As part of Brexit planning, UK undertakings involved in regulated cross-border activities are assessing if it is necessary to separate out non-UK, EEA elements of their business. There are many options open to undertakings looking to restructure their businesses to mitigate against the impact of Brexit (and in particular the loss of passporting rights). These include Insurance Part VII transfers, EU cross-border mergers, establishment of a Societas Europaea (SE) etc. However, to the extent that such options depend on EU law, they can only be exercised for as long as the UK is part of the EU.
  9. Contractual issues:  Post-Brexit, many aspects of EU law will no longer form part of English law. Parties may consider renegotiating their contracts so that they are subject to Irish law if they wish for their contracts to be subject to EU law once the UK has left the EU. There are many similarities between Irish law and English law but, crucially, EU law will still form part of Irish law post-Brexit.
  10. International Trade Agreements:  Post-Brexit, the UK will no longer be able to avail of International Trade Agreements negotiated by the EU with foreign jurisdictions e.g. the EU-US Covered Agreement on insurance and reinsurance regulation.
  11. Other issues: Other general Brexit issues in relation to taxation, data protection, capital markets, litigation, employment, outsourcing arrangements and pensions and competition will apply equally to the European (re)insurance industry. 
 

Contact:

John Larkin

John Larkin
Partner

E: john.larkin@williamfry.com
D: +353 1 639 5224