EIOPA issues recommendations to European National Competent Authorities to minimise risks to policyholders in the event of a no-deal Brexit

Posted in Financial institutions Financial services Banking and finance

On 19 February 2019, the European Insurance and Occupational Pensions Authority (EIOPA) issued nine recommendations to the National Competent Authorities (NCAs) with responsibility for the supervision of insurance undertakings and insurance intermediaries in European Union (EU) Member States.

The recommendations provide the NCAs with guidance on EIOPA’s expectations in relation to the treatment of UK authorised insurance undertakings and intermediaries that cover risks in their jurisdiction after the UK leaves the EU. The recommendations will only apply if the UK leaves the EU without a withdrawal agreement in place (a no-deal Brexit). In the event of a no-deal Brexit, the UK will become a ‘third country’ on 30 March 2019. Insurance undertakings and intermediaries will lose the benefits of access to the EU Single Market and will cease to be authorised to write new business, pay existing claims or undertake insurance distribution activities.

The recommendations come at a time when a number of EU Member States have introduced measures to protect EU policyholders of UK policies in the event of a no-deal Brexit. So far the countries that have introduced such measures include France, Germany, Ireland and Luxembourg.

The recommendations include the following:

  • Orderly run-off - NCAs should either introduce a legal mechanism to facilitate the orderly run-off of UK insurance business or should require that UK firms operating in their jurisdiction immediately take all necessary steps to become authorised. UK insurers should not write new contracts in EU jurisdictions unless authorised to do so.
  • Authorisation of third-country branches – UK insurers may seek authorisation to carry out cross-border business through a branch in an EU Member State. NCAs must ensure that the conditions for branches are fulfilled but may apply the principle of proportionality on the basis that the UK was subject to Solvency II immediately before it left the EU.
  • Portfolio transfers – NCAs should allow UK insurers to finalise portfolio transfers from the UK to an EU undertaking provided that the transfer was ‘initiated’ before Brexit. This, EIOPA suggests, is where the UK regulator has notified the NCA about the transfer, paid the regulatory transaction fee and appointed an independent expert.
  • Change in the habitual residence or establishment of the policyholder – Solvency II sets certain rules in respect of the ‘location of risk’ that determine where business is written. The recommendations state that where a life or non-life policy (not covering buildings, contents or vehicles) was concluded in the UK but the policyholder later moves with the result that they have a habitual residence in the EU, NCAs should consider that this contract was written in the UK and that the UK remains the state where the risk was placed.
  • Distribution – UK intermediaries that wish to continue to distribute (re)insurance products to European policyholders should be registered within the EU. Note that this means that UK firms cannot rely on the registration of EU producing brokers as the requirement for registration will apply throughout the distribution chain where there is an EU policyholder or EU risk . Where intermediaries seek to establish branches in the EU, NCAs should ensure that any legal persons have sufficient corporate substance. The recommendations also state that where a UK intermediary is undertaking distribution activities in the EU, NCAs should ‘take into account that only the consistent and uniform application of the IDD can guarantee the same level of protection for consumers and ensure a level playing field in the Union’. This is clearly reminding authorities that their primary objective in looking at activities must be the protection of consumers.

What next?

The recommendations will only be applicable should the UK leave the EU without an agreement in place. However, EIOPA will expect NCAs to introduce measures to meet the above recommendations (or explain why they have not done so) and confirm the status of such measures within two months from publication (and translation) of the recommendations.

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