Brexit fallout on insurance crafts

The six activities most exposed to Brexit are:

1. Retail banking,
2. Business and investment banks,
3. Insurance and Reinsurance companies,
4. Asset and wealth management companies,
5. Some stock market activities on the British Stock Exchange Market,
6. Insurance-related financial activities: accounting, legal services, databases, financial start-ups.

Brexit fallout on free delivery of services and establishment

Should the United Kingdom leave the European Union without agreement, both the insurance and reinsurance businesses will lose their European passport, the master key that has so far provided them with free delivery of services and the freedom of establishment.

Free delivery of services is the possibility granted to a licensed company of a member State of the European Economic Space to offer its services in another member State of the same space without being established there and without any requirement to obtain license from the latter.

Freedom of establishment is the possibility granted to a licensed company in member State of the European Economic Space to provide services in another member State of that space from a branch or an agency located in that other State witout being locally licensed.

The European passport provides access to the markets of all European Union States without being required to have additional license. The license obtained from the country of origin shall do.

Brexit fallout on insurance contracts

European legislation does not detail the legal consequences emanating from the loss of a European passport for contracts sealed before Brexit date. British insurers on one side and European insurers on the other are therefore up against a new situation about which they have to decide. Is this withdrawal going to mean loss of license or loss of passport?

The first option is about a purely administrative act which applies to a single insurer while the second pertains to a global act which applies to all the players and which directly results from a political choice of the British people to quit the European Union.

It is fair to say that the loss of the unique passport will bear consequences on the new insurance contracts underwritten with European customers of British insurers. There will be no bearing on the old contracts which are poised to be valid until their expiry.

However, with the expiry of passport, across-the-Channel insurers would have no possibility to underwrite new contracts with their customers established in the European Union, to renew those contracts or make major amendments thereof. The main consequence deriving from this blockage would be the increase of run-off market and portfolio transfer operations.

European customers, keen on maintaining ties with British insurance service providers, will have to lean on accredited financial service providers to carry out these operations within the European Union.

Brexit consequences on insurers’ solvency

Following their exit from the single market, British insurers will no longer have to comply with the regulations imposed by the European Union, in particular, Solvency II prudential rules. Insurers and reinsurers will be vulnerable and likely to be affected by this situation.

Indeed, Solvency II has created a distinction between exposure to risks located within the European Union and those located outside the Union. Default risk assessment of counterparty, concentration or spread is based on asset rating. If in the future, rating shall emanate from British agencies, it shall, therefore, be reviewed by European ones according to new calculations. Meanwhile, Brexit may also bear some impact on credit quality of British bonds.

Eventually, EIOPA, European Insurance and Occupational Pensions Authority, is recommending to European insurers, placing their risks in the United Kingdom, to reduce the credits they detain with these reinsurers. In this case scenario, these insurers may be up against delayed reimbursements or even non-settlement at all. For some European countries, recourse to non-community reinsurers is possible but the credits on the latter shall not be deemed as assets held to cover regulated liabilities.