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Article | FI Observer

Brexit- the implications for your financial lines insurance programme

Financial, Executive and Professional Risks (FINEX)
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By Marcus Porter-Wright and Martin Oscroft | November 7, 2019

How will Brexit practically affect Financial Institutions’ (FIs’) insurance programmes, and insurers’ ability to pay claims?

Background

It is still unclear on what terms the UK will leave the European Union (EU), and indeed when, given the UK has now been granted an extension until 31 January 2020. If the UK leaves the EU without a Withdrawal Agreement being reached, it will rescind its membership of the Single Market and the EU Customs Union and will no longer be bound by the EU’s “Four Freedoms” – which includes the free movement of services.

The freedom to provide regulated financial services in the EU regardless of where an entity is based is known as “passporting rights”. Passporting enables insurers to underwrite business across borders in the EU under one license (be it based in the UK or any other EU member state). When the UK leaves the EU, whether with a Withdrawal Agreement or not, it is not expected that passporting rights will be preserved between the UK and EEA countries.

When passporting ends, insurers will need to be licensed to underwrite UK business in the UK, and for EU business in the EU. Insurers not licensed may be prohibited by law from underwriting new business and administering existing policies, including settling claims. Unlicensed Insurers will be in the difficult position of having to either break their contractual obligations to administer existing policies (including paying claims) or breach legal obligations which may prevent them from doing so. As FIs are managing their own Brexit plans, we consider what impact Brexit will have on their financial lines insurance policies.

Who is affected by Brexit?

From an insurance perspective, Brexit impacts (i) risks based in the UK which have EU based insurers, or (ii) EU based risks with UK based insurers. The key is to ascertain where the risk is based. For FIs’ liability policies (the position may differ for other lines of insurance) this is considered to be either where the policyholder or each of the named insureds are based and would typically be their registered office address; the view may however vary amongst brokers and insurers. Where there is a Brexit impact, an insurer will not necessarily be licensed to carry out services post Brexit, so it is important to check their Brexit plan.

Brexit impact summary table
Risk Location Insurer location Brexit impact?
Rest of world (not EU or UK) located policyholder / insureds UK or EU domiciled insurer No
UK located policyholder / insureds UK domiciled insurer No
EU domiciled insurer Yes
EU located policyholder / insureds UK domiciled insurer Yes
EU domiciled insurer No
UK and EU located policyholders / insureds UK domiciled insurer Yes
EU domiciled insurer Yes

Preparations by insurers

Planning by insurers has generally been premised on the scenario of a no-deal Brexit and the withdrawal of passporting rights. While some insurers are already able to write EU and UK risks through different entities within their corporate structure, others have been reorganising themselves so they may continue to operate and provide services in a compliant manner in anticipation of Brexit. The solutions which insurers have adopted may include one or more of:

  • Establishing subsidiary entities in the UK or EU and effecting portfolio transfers of the business which can no longer be serviced to a different entity in the group (there are prescriptive rules as to how portfolio transfers are carried out, with the involvement of the Court, independent verifiers and rules relating to engagement with policyholders; there is a high degree of policy holder protection in a portfolio transfer).
  • Establishing UK branches of their EU companies, in order to be licensed in both the UK and the EU.
  • Converting to a SE (Société Européenne) and creating a branch in the UK.

Willis Towers Watson has been engaged with key insurers to track their plans and progress from the outset. We understand that most insurers’ Brexit preparations are now complete, which has perhaps been assisted by the original deadline of March 2019 having been extended. As each insurer is enacting its own plan to continue to provide cross-border services, insurers must be assessed on an individual basis.

Placing and administering policies

The UK’s withdrawal from the EU may affect the way in which FI insurance policies are placed and administered by insurers, depending on the structural solution they adopt (see above).

Insurers may need to place and administer a policy through a different entity in its corporate structure. Where a policy covers both UK and EU based businesses, insurers must be able to administer the policy in both territories. In practice, in these circumstances, insurers are using both their UK and EU based entities to underwrite the risk. This typically means having two sections in the policy “slip” (which share the same policy limit) and a nominal division of the risk between the two territories.

Where UK domiciled insurers have elected to establish new European domiciled insurance companies, no single European hub has emerged to mirror the strength and depth of the current London market in terms of the skills and experience of its personnel. Therefore, it is anticipated that individuals based in the UK will continue to place and administer EU client portfolios. Where business is still serviced in the UK, there may be additional requirements to satisfy the local European regulator of the jurisdiction in which the insurer is based. This may include, for example, involving a locally regulated individual in regulated activities. It remains to be seen what impact, if any, this might have on the quality of service provided to clients in the administration of policies.

In the event an insurer places or administers a policy from a different territory, there are other potential issues to consider. For example: (i) the impact of the change to the regulator overseeing the insurer and possibly the ability to access specific compensation measures in the jurisdiction, (ii) any tax implications, and (iii) whether the change may result in any proposed policy changes, for example to the jurisdiction and governing law clauses.

Claims

  1. New (“post Brexit”) claims

    Provided carriers have an effective strategy in place to underwrite new business in a compliant way after the UK leaves the EU, there should not be any problem processing those claims from a regulatory perspective. There may however be changes to the way in which claims services are provided (for which see above).

  2. Historic (“pre-Brexit”) claims

    FIs’ liability policies such as Professional Indemnity and Directors’ and Officers’ Liability policies can have long-tail claims. Claims can run for a long time before insurers are required to indemnify costs or liability payments. It is also a feature of claims made policies that “circumstances” notified to policies can attach future claims that arise which have some causal connection. Therefore, insureds may look to historic policies for claim payments long after the UK has left the EU.

    Insurers are responsible for putting in place appropriate arrangements that enable them to continue servicing historic business. Insurers’ ability to service historic policies will depend on the strategy they have adopted. For example, where carriers have effected a portfolio transfer it is likely that long-tail claims will have formed part of the transfer. Therefore, in order to consider whether your existing claims (or potential claims) may be impacted by Brexit you must review each notification which has been made individually and each of the insurance carriers on the programme too. The starting place is whether a payment needs to be made from the EU to the UK or vice versa (where for example a UK insurer pays a UK based policyholder/insured, or an EU based insurer pays an EU based policyholder/insured, there is no issue.)

  3. Lloyds

    While it only applies to policies underwritten by Lloyd’s underwriters, and may not be contractually binding, it is interesting to note that Lloyd’s has committed that its underwriters will continue to honour their contractual obligations, including paying valid claims, in the event it has not transferred all of its European business to the Lloyds Brussels entity before the UK leaves the EU. Lloyd’s have stated that they “expect to have the support of all European regulators as it goes to the heart of treating customers fairly”.

Broker services

Insurance brokers have also been preparing for Brexit. Willis Towers Watson has put in place a broking solution which will enable it to continue to provide services across borders in a compliant manner with as little disruption to clients as possible. This involves transferring the relevant portfolio of Willis Limited EU clients to its Belgian broking business, Willis Towers Watson SA/NV. Consent has been sought from affected clients. The proposed business transfer will not take place while the final form and timing of Brexit remains uncertain. Until then Willis Limited continues to operate with full passporting rights within the EU and can continue servicing the current EU client portfolio from the UK.

For the reasons set out above, notably the concentration of skills and experience based in London, it is also anticipated that UK based individuals will continue to service EU client portfolios once the UK has left the EU. In these circumstances there may be additional requirements to satisfy the local European regulator, for example involving a locally regulated individual in regulated activities.

What should you do?

Discuss with your broker how your insurance programme placement and administration, including the payment of claims, may be impacted by Brexit. In particular their insights into:

  • insurer Brexit preparations and implications for administering policies and paying claims to ensure you partner with the right insurers; and
  • potential impact on any of your existing notifications.

Please speak to your usual Willis Towers Watson contact if you wish to discuss this further.

Authors

GB Head FINEX Financial Institutions

Lead Relationship Manager, Financial Institutions, FINEX Global

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