The impact of the draft Withdrawal Agreement and the Outline Political Declaration on the Future Relationship on the insurance industry
On 14 November 2018, following approval by the UK Cabinet, the UK Government and the European Union (the EU) published the provisionally agreed text of the draft agreement on the withdrawal of the United Kingdom of Great Britain and Northern Ireland from the European Union and the European Atomic Energy Community (the Withdrawal Agreement), as well as a non-final draft of the Outline Political Declaration on the Future Relationship (the Political Declaration). This has triggered a process of seeking approval of these texts by the remaining members of the European Union and the European Parliament, as well as by the UK Parliament pursuant to the European Union (Withdrawal) Act 2018.
Whilst it remains uncertain whether the Withdrawal Agreement and the Political Declaration will receive the required approvals, if adopted they will have a significant impact on the insurance industry.
On the face of the Withdrawal Agreement and the Political Declaration, there is little of interest to the insurance industry. Indeed, the word “insurance” only appears 24 times and then only in the context of social security type obligations for workers and a passing reference to the European Insurance and Occupational Pensions Authority. However, the more general provisions of the Withdrawal Agreement have a profound impact on the ability of the industry to continue to operate cross-borders and the various Brexit contingency plans that are currently being put into place.
First and foremost, the Withdrawal Agreement confirms there will be a transitional or implementation period lasting until 31 December 2020.
There is power under the Withdrawal Agreement to extend this period, although the end date has been left undefined in the published draft.
Licensing and passporting
Article 127 of the Withdrawal Agreement provides, inter alia and with a few minor exceptions, that:
- Union law is applicable to and in the UK during the transition period and that Union law shall produce in respect of and in the UK the same legal effects as those which it produces in the Union and its Member States
- unless otherwise provided, during the transitional period, any reference to Member States in the Union law applicable pursuant to the Withdrawal Agreement, including as implemented and applied by Member States, shall be understood as including the UK.
These simple statements cover a multitude of issues, including:
- enabling UK insurers (including for these purposes Lloyd’s syndicates) to continue to benefit from passporting rights during the transitional period
- ensuring the much discussed continuity of contracts, such that UK insurers can continue to pay claims in respect of policies entered into before 29 March 2019 without fear of reprisal from EEA regulators up to the end of the transitional period
- preserving the ability of insurers to restructure their businesses through processes derived from EU directives, including insurance business transfers (whether pursuant to Part 7 of the Financial Services and Markets Act 2000 or otherwise), cross-border mergers and the use of SEs, again up to the end of the transitional period
For insurers passporting into the UK, the Withdrawal Agreement allows continued market access up to the end of the transitional period without any need to restructure or be re-licensed, although arguably the UK’s unilateral implementation of a temporary permissions regime had already removed the cliff-edge threat of a no-deal Brexit on 29 March 2019.
The UK motor industry in particular will breathe a huge sigh of relief at the Gibraltar protocol annexed to the main Withdrawal Agreement. Although there are a number of provisions specific to the unique position of Gibraltar and the ongoing tensions with the Spanish government, the provisions outlined above apply equally to insurers operating from Gibraltar.
Future trading arrangements and the Political Declaration
If the Withdrawal Agreement is quiet about insurance, the Political Declaration is silent, which is perhaps not surprising as it runs to fewer than 2,500 words and is high level in the extreme.
What the Political Declaration does say about financial services in general is that there will be commitments to “preserving financial stability, market integrity, investor protection and fair competition, while respecting the [UK’s and the EU’s] regulatory and decision-making autonomy, and their ability to take equivalence decisions in their own interest”. This focus on equivalence is unfortunate for the insurance industry as, unlike some other financial services, equivalence under Solvency II does not grant market access for insurance business (reinsurance is treated differently under Article 172 of the Solvency Directive pursuant to which equivalence does come with market access). At present therefore it seems unlikely that the Withdrawal Agreement or Political Declaration will preserve passporting rights for UK insurers.
For reinsurance, there is a glimmer of hope in that there is a commitment to reaching equivalence decisions as soon as possible after 29 March 2019, endeavouring to conclude those assessments by 30 June 2020 . However, in a missed opportunity, neither document recognises the important issue of contract continuity following the expiry of the transitional period, meaning that the contingency plans that many hoped would be unnecessary will have to be deployed by the end of 2020.