German government takes preparations to pave the way for a transitional regime for the run-off of the German business of UK insurers and reinsurers in the case of a hard Brexit
The date on which the United Kingdom (UK) will leave the European Union (EU) is coming closer. Unless the Withdrawal Agreement is ratified by both the UK and the EU, the UK will become a “third country” under EU legislation on 30 March 2019 (Brexit date). Consequently, in the absence of a ratified Withdrawal Agreement (which includes an implementation period to 31 December 2020), UK insurers and reinsurers will cease to benefit from the so-called European Passport allowing them to conduct business in the EU and European Economic Area (EEA) based on their home state licence and subject primarily to the supervision of the UK regulatory authorities. As third country insurers and reinsurers, most will need to establish a branch in each of the EEA countries in which they wish to operate or establish at least one subsidiary in the EEA which may passport into other EEA jurisdictions.
It is currently still uncertain whether the Withdrawal Agreement will be ratified. Therefore, all EU financial services firms including insurers and reinsurers are still under a duty to be prepared for a hard Brexit, where there is no agreement between the EU and the UK.
During the past months, regulatory authorities, the European Commission (Commission) and the European Insurance and Occupational Pensions Authority (EIOPA) have repeatedly urged insurers and reinsurers from the UK doing business in other EEA countries (as well as EEA insurers and reinsurers doing business in the UK), to take precautions in order to ensure service continuity in case of a hard Brexit. Lately, on 5 November 2018, EIOPA called for immediate action to ensure service continuity in cross-border insurance. According to EIOPA, whereas the insurers with the largest cross-border business in the EEA30 jurisdictions have taken action and are implementing contingency measures, 124 undertakings from the UK and Gibraltar with cross-border business in EEA30 jurisdictions have no or insufficient contingency plans in place to ensure service continuity in case of a hard Brexit.
On 13 November 2018, the Commission issued a communication setting out a Contingency Action Plan to prepare for the withdrawal of the UK from the EU. The Commission stated that whilst the transfer of activities and capacity-building in the EU27 was ongoing and should be accelerated, it would not be possible to complete it in time in all areas by the Brexit date.
On 20 November 2018, the German Federal Ministry of Finance (BMF) published a draft act laying the ground for a limited transitional regime for UK financial services firms including insurers and reinsurers following a hard Brexit. According to the proposed amendment to the German Insurance Supervision Act (Versicherungsaufsichtsgesetz), the German Federal Financial Services Authority, (Bundesanstalt für Finanzdienstleistungsaufsicht, BaFin) will be granted the authority to issue an order allowing UK insurers and reinsurers that conduct business in Germany under the European Passport (either cross-border or through a German branch), immediately before the Brexit date to continue their business in order to be able to settle their insurance contracts concluded prior to that date.
The transitional regime will:
- require action from BaFin which may use its authority to trigger the transitional regime in order to protect the interest of policyholders, beneficiaries and cedents in a continuity of service;
- apply only to UK insurers and reinsurers with business in Germany prior to the Brexit date;
- only allow for a run-off of existing policies; and
- terminate at the latest at the end of 2020.
The German government expects affected insurers and reinsurers to use the time period of the transitional regime to terminate and settle insurance policies, obtain a licence allowing for the administration of the policies or to transfer them to a licensed entity. It is interesting to note that this seems to imply that portfolio transfers under UK law will be acknowledged under German law during the transitional regime provided that the current legal provisions including the requirement of a BaFin consent are met.
The two-step procedure of a parliamentary act followed by a BaFin order has been chosen so that the German authorities can react flexibly to any developments regarding Brexit. It will probably take until the beginning of 2019 to enact the amendment to the German Insurance Supervision Act. Once this has occurred, BaFin may grant the relevant order on short notice.