Different Brexit scenarios
Even with the recent postponement of Exit Day i.e., the date for Britain's withdrawal from the European Union toat the latestOctober 31, 2019, a No-Deal Brexit1 or a Hard Brexit is not entirely out of the question. This remains the case, even if the EU-UK Withdrawal Agreement is ratified by UK parliament given that the future of a deal for financial services cooperation is still not certain, thus the likelihood of a Hard Brexit as opposed to a customs union or other soft Brexit options still remains likely. This has a number of potential impacts for the insurance and re-insurance sector as explored in this first Client Alert in a special series of "Insurance Insights," which focuses on strategic considerations for (re-)insurers looking to access Germany. This Client Alert also analyzes recent legislative measures of the German policymakers to the current Brexit scenarios. We discuss considerations as they apply to intermediaries in a separate Client Alert in this series.
If "Brexit means Brexit" then "third country means third country"
The EU's single market for insurance was largely driven ahead by the Solvency II Directive. This contains rights on cross-border provision of services or establishment of branches as well as the location of risk concept.2 Upon the UK's exiting the EU, it will become what the EU terms a "third country" for legal and regulatory purposes. Probably the most important consequence of a No-Deal as well as any form of Hard Brexit on the insurance sector is the loss of the European passport for entities looking to access the EU from the UK. Consequently, banks, (re-)insurance companies and investment service providers will no longer be able to provide services from the UK into the EU-27 based on the European passporta central component of the European financial market. Insurers, re-insurers and their counterparties and clients (including end-users) will want to take note, as without authorization or exemption such third country entity would be breaking the law when attempting to continue to service existing contracts or trying to write new policies. This would also apply to EU-27 exposures written in the UK by an EU authorized insurer operating in the UK.
These concerns remain valid as, despite the delay to Exit Day, many market participants may still be in various degrees of Brexit-proofing both in terms of two separate but interlinked workstreams i.e., the legal entity structuring/market access and the contractual continuity/repapering workstreams. On the legal entity structuring/access work stream, this includes having to decide whether affected firms would rather set up a corresponding business unit in the EU in order to access the market or whether there are any structural solutions such as reverse solicitations or exemptions that can be applied for, to continue conducting new or winding down existing business.
Views of national and European supervisors
Any of those considerations will need to be compliant with the European Supervisory Authorities (ESMA, EBA and notably EIOPA's) supervisory principles on relocations (SPoRs),3which are also complemented by the supervisory expectations and powers of the national competent authorities such as Germany's Federal Financial Supervisory Authority (BaFin). With the amount and varying degree of preparations of affected firms still a work in progress on both sides of the Channel and the Irish Sea, action has also begun at the national legislative level, including Germany, to grant temporary relief.4 It remains to be seen whether these national instruments, which differ amongst EU Member States, may collide with the mandate of EU authorities including powers, which have been granted by EU legislation to EU as opposed to national authorities.
Statistics from 2017 show that insurers coming to Germany from the UK (and Gibraltar) make up the largest proportion of...