Brexit and Insurance Distribution

Brexit and Insurance Distribution

With the transitional measures coming to an end and regulators still focussing on conduct but now also even more focussing to a greater extent on governance and mind & management (partly due to ESG), the focus will be on how insurance companies and Lloyd’s Managing Agencies manage to bring their products to market.

What is the problem? Post Brexit, EU passporting rights were lost both for insurance companies as well as intermediaries. The passporting system allows financial service providers established in one EU or EEA member state to operate in other countries of the European single market with only minimal additional authorisation requirements. On the basis of this regulation, pre-Brexit it had been possible for UK insurance companies to enter into contractual relationships with customers on the continent or vice versa. The end of the transition regimes forces insurers to look for other ways to contact clients in Continental Europe and to underwrite EEA risks. Some interim measures include secondments to UK branches of European entities, including Lloyd´s Insurance Company SA. With the increased regulatory attention and scrutiny, and the requirement of a certain ratio of staff to be dedicated to European risks, many Managing Agencies and UK insurance companies are now looking at solutions for the mid to long term.

Possible scenarios include the establishment of new companies or subsidiaries, as well as Managing General Agencies (MGAs). Licensing and governance requirements in the various EU members states are similar, but not identical. Also, other factors might influence the decision including the financial and political stability of the respective country, language capabilities of the regulator or employment law (given that also mind & management requirements will apply and a certain number of local employees will most likely be a requirement). Decisions will also depend on the nature of the business, since decisions might be different depending on short or long tail business being affected. For existing business, the equivalent distinction may be made between the different insurance lines. In areas such as property and casualty, contracts could be transferred directly to a new entity or subsidiary. Alternatively, at renewal, due to their short duration, they can be entered into by the new entity In the case of long-running life insurance contracts, however, the situation is quite different and these may have to be transferred from the beginning, via a Part VII transfer or equivalent.

In any case, there will be corporate and regulatory issues to solve. Also, time needs to be taken into account when planning such changes as in some instances, statutory deadlines apply for applications to regulators, potentially slowing down the process of creating new establishments. Lloyd´s itself is well advanced and has transferred its EEA risks to Lloyd´s Insurance Company SA via a Part VII transfer. Similar transactions might have to occur depending on the solutions sought and found by other market participants.

Simmons & Simmons is happy well placed to advise on all matters relating to these important strategic issues above, including finding the right jurisdictions and corporate vehicle as well as advising on the underlying business transfers for the continued success of an insurance and insurance distribution enterprise.