Impact of Brexit on insurance contracts

The “catch-22” problem

Since the referendum result in June 2016 for the UK to leave the EU, one of the key concerns is the potential loss of passporting rights post-Brexit. The passporting regime allows countries within the EU to have licence-free access to the financial services markets in the UK and vice versa. The continued ability post-Brexit to service contracts of insurance entered into under a passport pre-Brexit between UK insurers and EU policyholders (or vice versa by EU insurers with UK policyholders) is one of the big unanswered questions.

Nicky Morgan raised this concern in a letter to Philip Hammond on 14 September 2017. She notes that there are hundreds of thousands of insurance contracts sold under passporting arrangements with a duration that extends beyond the date the UK is due to the leave the EU. Servicing an insurance contract (e.g. paying a claim) is a regulated activity so, if no regime similar to passporting is put in place, insurers could be faced with either breaking the contract or breaking the law in a host country where a licence is required.

One way a UK insurer could avoid ending up in this unenviable “catch-22” situation, is to use the provisions of Part VII of the Financial Services and Markets Act 2000 to transfer the contracts to a new subsidiary elsewhere in the EU. However, as Nicky Morgan notes in her letter, there are significant costs involved in doing this and there may also be insufficient time to do so particularly if, as the PRA expects, the courts receive a significant increase in the volume of Part VII transfer requests.

The Chancellor’s response

In the Chancellor of Exchequer’s response, published on 11 October 2017, Philip Hammond says that, whatever the final outcome of the negotiations, an integral part of delivering UK’s withdrawal from the EU will be the negotiation of a time-limited interim period. The purpose of the interim period would be to provide certainty and avoid a cliff-edge for businesses and individuals during the transition, and also to ensure that businesses do not face two sets of changes as adjustments are made from UK’s current relationship with the EU to a new relationship.

In terms of the ultimate position post-Brexit, Philip Hammond notes that whilst the final EU-UK relationship will be a matter of negotiation, a mutual process to maintain coherence between the UK and EU’s regulatory regimes will be an essential component of the relationship that the UK seeks to negotiate with the EU. He says this is also likely to mean agreeing supervisory arrangements that are symmetrical, reciprocal and reliable.

Will practicality prevail?

The idea that insurers could be left in a position where their only options are to break their insurance contracts or break the law is so impractical that there is an assumption that some sort of interim arrangement will be agreed. However even if a time-limited interim period is agreed, this will not resolve the problem as contractual obligations under insurance contracts entered into under a passport pre-Brexit could run for many years (much longer than the interim period is likely to be). One way to resolve the issue would be for the UK and EU to reach an agreement on the “grandfathering” of existing insurance contracts i.e. preserving the ability of insurers to service insurance contracts for the life of those contracts which were written lawfully under a passport pre-Brexit.

In relation to passporting of insurance contracts going forward, Philip Hammond is clear in his letter that the aim is to secure a reciprocal arrangement between the UK and EU. However, as Philip Hammond himself notes, this is an “aim”, and there is currently no guarantee of a reciprocal arrangement. How these negotiations unfold is a matter of great interest to the insurance market.