Brexit and Cross-Border Underwriting: Status Quo, Expectations of necessary changes Amendments Speakers: Guy Soussan, Steptoe & Johnson gsoussan@steptoe.com Guenter Droese, ECIROA guenter@droese-partner.com 2634944
Topics for dis iscussion • Brexit withdrawal process • Insurance perspective and the inter-relation between EEA-UK market • The passport as a gateway to cross-border underwriting • Alternative third country experiences and prospects for the UK • What decisions may (re)insurers make based on the importance of EEA underwriting to the UK and vice-versa • Legal and other challenges 1
Brexit: what do we know about th the withdrawal process? • UK notification is foreseen for March 2017, subject to UK Supreme Court decision due in December • A two-year process from UK notification to European Council (unless extension) • A withdrawal agreement will be concluded on behalf of the Union by the Council (qualified majority) after European Parliament simple majority vote • Negotiation of a (separate) agreement on future relations with the EU, including trading relations, follows withdrawal • The UK may not initiate trade deals with non-EU countries before withdrawal (EU exclusive competence) 2
EU la law applies during withdrawal period EU law – “rights as well as obligations” – continues to apply to and within the UK. Donald Tusk, President of the European Council Britain will play a "full and active role in the EU" until it leaves. Theresa May, UK Prime Minister “Much financial regulation currently applicable in the UK derives from EU legislation. This regulation will remain applicable until any changes are made, which will be a matter for Government and Parliament. Firms must continue to abide by their obligations under UK law, including those derived from EU law and continue with implementation plans for legislation that is still to come into effect .” UK’s Financial Conduct Authority “Britain cannot negotiate a free- trade agreement until it has left the European Union” Danuta Hübner , Chair of the European parliament’s constitutional affairs committee 3
What will happen aft fter Brexit? The UK Prime Minister has stated that she wants a “We hope to have the UK as a close partner in the bespoke model rather than an “ off the shelf ” solution UK future. But leaders made it clear that access to the negotiating position single market means acceptance of all four freedoms, including the freedom of movement. We “ There needs to be a bilateral deal providing as full two- will not sell off our freedoms and there will be no way market access as possible” British Bankers Association single market "à la carte". Donald Tusk, following 28 June informal meeting of 27 EU leaders Retaining passporting and preventing a data protection quagmire, seeking a new improved immigration system Britain must not be allowed to “keep the nice and opening up trade deals in key markets like India and things” that come with EU membership without China. “ We are determined to get the best possible taking responsibility for the fallout from Brexit . outcome for the industry ” Association British Insurers Sigmar Gabriel, German Economy minister “ A clean break would help the U.K. to thrive as an “ Euro zone banks and insurers need to prepare in international financial centre ” Politeia case Britain opts for so-called hard Brexit where it The Great Repeal Act will come into force “from the day loses access to EU financial markets” Francois we leave the European Union” David Davis, UK Secretary Villeroy de Galhau, ECB policymaker of State for Exiting the European Union 4
In Insurance perspective “ Customers should remember we remain part of the EU until the process of leaving is complete and they should therefore avoid hasty decisions about their financial matters ” Huw Evans, Director General of the Association of British Insurers “ London can remain insurance capital after Brexit ” Inga Beale, Lloyds of London “ It is clear that passporting rights, access to the single market and visas are top of the list of what London businesses demand from any exit negotiations” Sadiq Khan, the Mayor of London “ Brexit will allow insurers to escape ‘absolutely dreadful’ EU regulation ” Lord Turnbull, former non-executive director, Prudential 5
In Inter-relationship between U UK/EEA (r (re)i )insurance markets Number of firms with at least one passport : UK-EEA EEA-UK • Solvency II 220 726 • IMD 2758 5727 Source: Letter from FCA to House of Commons, 17 August 2016 6
Th The passport: gateway to cross-border underw rwriting • A passport is recognition that an entity’s authorisation to do business in one EEA Member State is authorisation to do business in another EEA Member State. • It provides: • A single licence to operate (cross-border or branch) • Mutual recognition of supervisors • Home state control with some regulatory/legal requirements in the host state 7
Available cross-border market access absent passport • Non-admitted cover: acceptance and treatment remains Member State discretion • Cross-border insurance of MAT risks situated in the Member States • Passporting rights for Solvency II equivalent jurisdictions • Right to pursue reinsurance business on cross-border basis from equivalent jurisdictions • Equivalence determination not relevant for direct insurance 7
Cross-border underw rwriting by reinsurance captive • EU captive - UK cedant: market access under post-Brexit rules in the UK? • EU cedant - Swiss captive: cross-border underwriting possible due to equivalence determination • EU cedant - Bermuda captive: cross-border underwriting not possible in certain Member States due to caveat in the equivalence determination • EU cedant - captive from non-equivalent third country: cross-border underwriting not possible in certain Member States 7
Alt lternative thir ird country exp xperiences and prospects for the UK • EEA + EFTA membership e.g. Norway: access to the single market but no influence over EU legislation • Bilateral Agreements + EFTA e.g. Switzerland: no access to the single market (except reinsurance and non-life) except at national discretion despite Solvency II equivalence • A comprehensive FTA e.g. South Korea, Singapore and Canada: such agreements typically include financial services. Above agreements seen by EU as templates for future ones • WTO membership e.g. USA: no access to the single market except at national discretion. UK insurers can still provide MAT insurance subject to GATS limitations (the EU leaves this to MS national discretion); reinsurance is more challenging; unless EU equivalence is granted, national requirements (e.g. collateral) may be imposed 8
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Le Legal challenges associated wit ith Brexit • Contractual terms of existing and future policies • Territorial scope of cover • References to the EU and EU law • Standards of consumer protection embedded in EU legislation • Renewal and termination clauses • Servicing EU claims on existing policies • Choice of law • Jurisdiction and recognition/enforcement of judgment 10
Potential im impacts on product offerings and pri ricing • Contract law (potential for financial hardship linked to Brexit, contractual references to the EU or EU law, governing law and jurisdiction) • Capital market volatility (e.g. exchange rates, threat of UK ratings downgrade, effects on liquidity in key markets such as the secondary bond markets, potential negative interest rates) • Changes to the regulatory regime (e.g. UK unfair contract terms, gender equality rules and product liability are all based on EU law) • Personal data protection (potential restrictions on data flows between the UK and the EEA if UK does not negotiate an “adequacy agreement”) • Tax (direct, indirect and corporate taxation) 11
Equiv ivalence between UK and Solv lvency II II frameworks after Brexi xit • The Solvency II framework remains unchanged • The UK maintains the current national framework implementing Solvency II • Potential outcome • Identical requirements in the UK and the EU • No mutual recognition and restricted market access rights 11
Brexit and Cross-Border Underwriting: • Exit is terminating FoS – Freedom of Services • UK and London Market becomes off-shore • Insurance carriers need European footprint • Revision of Policy Wording of International Insurance Programmes
Brexit and Cross-Border Underwriting: • Policy Wording Check: - Language - Contract Law - Jurisdiction - Currency
Brexit and Cross-Border Underwriting: • Performance of Policy: - Insurance Premium Tax (levies, el.al) - Risk Control & Engineering - Claims Handling - Cross-Border Payments - Additional Cost?
Brexit and Cross-Border Underwriting: • Business to be affected? - Differentiation between Private Lines and Big/Commercial Risks - Life Insurance - premium payment without additional cost? - court in case of dispute? - tax privileges to be secured or lost? - Long Term policies - multi-year / specialties / tailor-made - occurence vs. claims made - D & O (continuity issue)
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