On 13 July 2020, the European Commission published an updated readiness notice to all stakeholders in the (re)insurance field regarding the withdrawal of the United Kingdom (UK) from the European Union (EU) at the end of the Brexit transition period (the Notice). The Notice replaces an earlier version, originally published in February 2018, and represents a stark reminder of the legal and practical implications for the (re)insurance sector of the UK becoming a ‘third country’ for the purposes of EU law from 1 January 2021. While the majority of (re)insurers and intermediaries have their contingency plans well established, and indeed activated in many cases, by now, the Notice serves as a timely prompt to all interested stakeholders to check that all necessary preparations are complete. In light of the continued uncertainty regarding the outcome of the fraught political negotiations on the future partnership between the EU and the UK, it seems prudent to ensure planning for a ‘no deal’ scenario remains a foremost consideration.

At the end of the transition period, the EU rules set out under the Solvency II Directive (2009/138/EC) (Solvency II) and the Insurance Distribution Directive (2016/97/EU) (IDD) respectively will no longer apply to the UK. The Notice highlights the key consequences of this change from the perspective of 1) authorisations 2) insurance contracts and 3) other aspects.

1. Authorisations

• UK insurance undertakings – will become third-country insurance undertakings and will lose the benefit of EU passporting rights to enable them to provide services in the EU, including via online sales.
• EU branches of UK insurance undertakings – will become branches of a third-country insurance undertaking and will require an authorisation from the ‘host’ EU member state in order to continue their activities (such authorisation excludes the right to conduct business across the EU).
• EU subsidiaries of UK insurance undertakings – legally independent companies established in the EU and controlled by or affiliated to insurers established in the UK can continue to operate as EU insurance undertakings on the basis of their authorisation in the relevant member state and subject to compliance with EU rules.
• UK reinsurance undertakings – should prepare for a situation where no equivalence for reinsurance is granted to the UK by the European Commission. If equivalence were granted following the ongoing assessment process, it would mean that reinsurance contracts concluded by UK reinsurers must be treated in the same manner as reinsurance contracts concluded by undertakings authorised in accordance with Solvency II. Without an equivalence declaration, UK reinsurers are subject to the conditions set by the EU member state in which they carry out their activity; such conditions cannot be more favourable than those applying to EU reinsurers.  For more insight into the current state of play on Solvency II equivalence for the UK, please read our article, “Brexit: The Current State of Play on Solvency II equivalence for the UK”.

2. Insurance Contracts

• Service continuity – the ability of UK insurance undertakings to continue performing certain obligations and activities deriving from existing contracts may be impacted by the loss of EU authorisation. The Notice advises all relevant firms to assess the impact of the end of the transition period on their operations and contract portfolios and, in cooperation with national regulators, identify and mitigate risks.

3. Other Aspects   

• UK (re)insurance intermediaries – these intermediaries will no longer be able to conduct business in the EU on the basis of their UK registration.
• Information disclosure – under both Solvency II and IDD, policyholders must be informed of the impact of the end of the transition period on their rights and on the provision of insurance services.
• Group supervision – similar to the reinsurance area referred to above, the assessment of the UK’s equivalence in this area is ongoing and stakeholders are advised to be ready for a no equivalence scenario. If no equivalence is granted by the European Commission, (re)insurance undertakings operating in the EU with a UK parent undertaking will be subject to Solvency II provisions permitting EU national regulators to require a worldwide group level supervision or to apply other methods aiming to ensure same, including the establishment of a EU holding company. Also, any group-level internal model covering a UK group which operates in the EU, approved by the UK regulator prior to the end of the transition period will no longer be recognised in the EU. A new application and approval by an EU national regulator would be needed.

The Notice acknowledges at the outset that it remains uncertain whether an agreement on a new partnership will be concluded by the EU and the UK before the end of the transition period. It seems generally accepted by both sides that October 2020 is the latest possible timeframe for any such trade agreement to be reached in order to allow for the necessary ratification processes involving EU member state parliaments. Irrespective of the outcome of these political negotiations, the Notice makes clear that the UK will be a third country as a matter of EU law once the transition period ends. Accordingly, all (re)insurance stakeholders must ensure that any outstanding actions are addressed in the final few months ahead. 

We will continue to monitor and update in respect of developments on this topic.  

Please contact a member of our Insurance and Reinsurance team, or your usual William Fry contact, if you need advice on your Brexit preparations.

Contributed by Shannon O’Neill