Brexit cliff-edge for in-force insurance policies

Written by David Gittings, CEO, LMA  |  18 October 2017


As the Prime Minister and the Chancellor of the Exchequer work out plans over spending to prepare for a possible ‘no deal’ Brexit, the cliff-edge alternative presents a critical challenge for re/insurers on both sides of the Channel. If passporting rights of risk carriers on one side to carry on business with customers on the other cease without alternative measures to ensure policies can be run-off until all claims are paid, then in-force insurance contracts may have to be transferred between UK and EU-authorised carriers, with the upheaval which that would entail.

For UK re/insurers, a complex and time-consuming Part VII transfer process may have to be undertaken to move policies to an EU-licensed carrier. Whether the move is to a new or existing insurer within their Group, or to a third party, the sheer number of Part VII applications, each of which requires expert reports and regulatory and court approval, is likely to be difficult to complete before Brexit takes place in March 2019. It would also be expensive, and inundate policyholders and their brokers with paperwork.

While that date may still seem some way off, the problem is increasingly urgent. Annual policies issued after 28 March 2018 may be left in a regulatory limbo by a ‘no-deal’ outcome. Existing long-term contracts which extend beyond the Brexit date would also be affected. Run-off and claims handling for UK companies with EU policyholders or other continental interests could present a range of challenges.
The solution is to negotiate the continuation of passporting rights for the life of any policy issued to a cross-border client, so that all liabilities can be run-off and policyholders’ expectations met. Since insurance regulators hold policyholder protection at the heart of their operations, no sustainable justifications exist to refuse such an arrangement. It would be of clear benefit to UK carriers with EU policyholders, as well as the other way around.

Politicians around the Brexit negotiating table should give the utmost respect to the interests of the policyholders they represent, and to the beneficiaries of claims, irrespective of the EU member state (including for the moment the UK) in which they are domiciled. 

Hundreds of thousands of insurance contracts that were sold under passporting rights will still have outstanding obligations, with claims to be paid, beyond 29 March 2019. The concern has been raised at the highest levels: in September Nicky Morgan MP, Chair of the Treasury Committee of the House of Commons, wrote to Chancellor Philip Hammond with the stark message that ‘without further action, insurers will lose the legal authorisation to service these contracts: they must break the contract or break the law’. The possible implications of either strategy are undesirable. 

As the European Insurance and Occupational Pensions Authority (EIOPA) stated in July, ‘the UK [is] the most important financial centre in the EU, contributing 24% of EU28 [’s] total financial and insurance activities in 2015.’ EIOPA referred to possible ‘specific arrangements that may be reached between the UK and the EU’, which could include the grandfathering of in-force insurance contracts.

It is therefore essential that this issue be placed near the top of the government’s Brexit-negotiation agenda, so that an agreement can be reached as soon as possible.