The 'grandfathering' question - that is, whether insurers can continue to rely on current passporting rights in dealing with existing customers after Brexit - is an increasingly urgent one for insurers. If this issue is not addressed early during Brexit negotiations, insurers may be left with the choice of breaking local law by acting without authorisation in relevant countries after March 2019, or not being able to honour contracts with their European customers.
Without grandfathering, insurers may need to choose to either sell the portion of their business involving the cross-border policies or move those policies to an EU subsidiary business. Both of these solutions would involve following the court process set out in Part VII of the Financial Services and Markets Act (FSMA). The process has a rigid timeline and would need to be completed before the UK exits the EU to be effective in relation to regulators in other EU jurisdictions where cross-border policies are held.
The scale of the problem is potentially significant. Statistically speaking, 7% of general insurance (GI) contracts and 3% of life contracts undertaken in the UK are cross-border, according to the Bank of England.
Substantial numbers of policies could therefore potentially be affected - most obviously long-term contracts like pensions and life insurance. But even annual policies put in place as early as next April would also be affected by a potential 'cliff edge' Brexit in March 2019, before their next renewal date
Nicky Morgan MP, the Chair of the House of Commons Treasury Select Committee, has now written to the Treasury highlighting that if this issue is not resolved insurers may have to choose to "break the contract or break the law" (2-page / 878KB PDF). This follows pressure from both the Association of British Insurers (ABI) and Lloyd's, as well as individual insurers, who have raised real concerns that if passporting rights fall away, there will be no basis on which existing policies can be fulfilled.
The chief executive of the PRA, Sam Woods, had earlier written to the Treasury Committee about the importance of this issue, ahead of a wider report in the autumn about Brexit-related thematic concerns and risks.
The prospect of "a significant increase in the volume of Part VII transfers to move contracts between entities", highlighted by both Morgan and Woods, creates additional time pressure on insurers who will need to move quickly to ensure the necessary processes can be completed in time if no grandfathering arrangement can be agreed. The process requires the input of the PRA and so is dependant on the length of the 'queue' with the regulator. This further increases the chances of insurers effectively running out of time to complete their contingency plans.
The government's negotiating position remains unclear. Although the Treasury has been making the right kind of statements about rejecting protectionist agendas from the EU, there has also been the suggestion of compromise on supervision. In the context of the UK operating outside of the EU and having little or no input into the direction of EU supervision post-Brexit, this could also raise significant concerns for UK insurers.
In the meantime insurers will need to be considering their options to ensure that they comply with the PRA's expectation that firms have appropriate contingency plans in place – even if that involves pre-emptively using the Part VII process to transfer business to ensure they can continue to service existing cross-border policies.
Alternatives have been put forward in the market but in a paper published in July, the European Insurance and Occupational Pensions Authority (EIOPA) confirmed that there could be no automatic recognition of authorisation from another supervisory authority and that all new applications must be treated on their own merits. EIOPA also encouraged local regulators to challenge any proposed risk transfer arrangements.
The message from EIOPA for insurers is clear: they are unlikely to be able to rely on minimal 'fronting' arrangements to continue with business as usual with just a notional regulatory base in another EU jurisdiction to allow them to replicate their current passporting arrangements.
The PRA is not expecting insurers to wait until Brexit has happened before they take action. As a result insurers should already be considering what actions they need to take to protect their ability to service existing cross-border policies. This may need to include acting quickly to complete any sales of transfers to subsidiaries.
Tobin Ashby is an insurance and wealth management expert at Pinsent Masons, the law firm behind Out-Law.com.