On 28 November 2017, the Bank of England (“BoE”) published its outlook for UK financial stability, a report on what it perceives as being the main risks to that stability. The headline grabber was the BoE’s view that the UK financial system was strong enough to withstand a disorderly Brexit. But buried away in the report was disconcerting news for all those who participate in the UK and European insurance markets.
In the report, the BoE has warned that a post-Brexit withdrawal of the so-called financial services’ “passporting” rights as between the UK and EEA states could hinder insurers’ ability to perform or service outstanding insurance contracts. As a reminder, subject to its fulfilment of certain conditions under the relevant single market directive, a firm authorised in a European Economic Area (“EEA”) state is entitled to carry on permitted activities in any other EEA state by either exercising the right of establishment (of a branch and/or agents) or providing cross-border services. This is known as “passporting” and is a hugely valuable right enjoyed by insurers and other financial services providers across Europe.
The BoE estimates that six million UK customers (representing £20 billion of insurance liabilities) buy longer term insurance products – such as life insurance – from EEA companies. Unless the UK Government and the EU legislates before Brexit, the BoE warns that the loss of EEA insurers’ passporting rights into the UK may restrict their ability to collect premiums and pay out on claims made by UK policyholders. The same issues may arise for those UK insurers with EEA based policyholders with the BoE estimating that 30 million EU policyholders (£40 billion of insurance liabilities) could be affected by the loss of passporting rights.
Legislation and co-operation between the UK and EEA governments is clearly needed to address such a serious situation, another unforeseen consequence of Brexit, otherwise insurers may be prejudiced and put to extra cost to find a work around solution. But this will not be easy given the slow pace of the Brexit negotiations to date, the relatively short time now left until Brexit in March 2019, and Michel Barnier’s recent suggestion that UK financial services businesses will lose their passporting rights after Brexit with no opt ins.
Also, continued uncertainty and a failure to secure something similar to passporting rights after Brexit could lead to disputes between insurers, policyholders, and reinsurers, and also between insurance industry participants on the one hand and government authorities and insurance regulators on other, as the insurance market looks to attribute blame for the costs of significant business losses or interruptions caused by a failure to adequately address future trading concerns.