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Insight into Brexit’s Threat to Insurance Contracts

Insight into Brexit’s Threat to Insurance Contracts
  • United Kingdom
  • Brexit
  • Insurance and reinsurance
  • Financial services


Gabriel Bernardino, Chairman of the European Insurance and Occupational Pensions Authority (“EIOPA”) announced recently at a conference on global insurance supervision that EIOPA would be setting its sights on how Brexit may affect market stability and consumers. Bernardino stated EIOPA intends to thoroughly analyse issues such as continuity of existing insurance contracts, data flows and supervisory co-operation between watchdogs. The content of his speech was recently published on EIOPA’s website.

This is of particular interest given the insurance industry’s concerns surrounding the significant number of existing insurance contracts which have a lifespan beyond Brexit in March 2019. There are also concerns that without a deal being done between the UK and the EU to secure the validity of pre-Brexit cross-border contracts after Brexit, insurance companies are at risk of breaking the law should they then make payments pursuant to those contracts of insurance.

With Brexit in mind, Bernardino also made reference to the Opinion issued by EIOPA in July 2017. This discussed EIOPA’s principles in relation to authorisation and approvals, governance and risk management, outsourcing of critical and important activities as well as on-going supervision including monitoring. Bernardino re-emphasised EIOPA’s position that “it expects undertakings to show an appropriate level of corporate substance and not display characteristics of an empty shell. The supervisors should carefully scrutinise any transfer of risks and require a minimum retention of risks from the authorised undertaking. As an indication, a minimum retention of 10 % of the business written could be envisaged.”

He went on to state that outsourcing of undertakings’ important functions should be subject to the full responsibility of the management body for the outsourced activity and should not:-

• materially impair the quality of governance;

• increase operational risk;

• impair the ability of supervisors to monitor compliance; or

• undermine continuous and satisfactory service to policyholders.

He said the principles set out in the Opinion will support national supervisory authorities to secure sound and convergent practices, with sound supervision demanding the appropriate location of management and key functions. “Empty shells or letter boxes are not acceptable.”

Meanwhile, Insurance Europe have also published their views on contractual continuity post-Brexit, in a position paper published on 11 September. In the paper, Insurance Europe highlight the challenges presented to the (re)insurance sector by Brexit in servicing (re)insurance contracts which have been written on a cross-border basis under passporting, and would be rendered unlawful on the date of the UK’s withdrawal. Insurance Europe highlight that, if (re)insurers are prohibited from servicing existing contracts (ie. by accepting premium payments or by paying claims) due to the legal and regulatory changes, this may lead to severe consumer detriment unless appropriate arrangements are made.

In the paper, Insurance Europe recommend a grandfathering arrangement for current long-term (re)insurance contracts as the most appropriate means of protecting citizen’s rights. They suggest that the grandfathering provision should go beyond just affirming existing contractual rights and should also maintain continuity of supervisory standards relating to insurance contracts.

Insurance Europe consider grandfathering to be the best solution because it provides a permanent solution which will run-off naturally as contracts expire. Other potential options described are transfers, either of individual policies or books of policies, or reliance on transitional measures. The paper highlights the issues with both of these alternatives, noting that transfers can be complex, lengthy and potentially require approval of courts, supervisory authorities and/or customers. Transitional arrangements, on the other hand, are expected to last for a 2/3 year period, which is insufficient given that insurance contracts, and in particular reinsurance contracts, will often have decades left to run.

The Insurance industry appears to have set an informal deadline of November to know whether an agreement can be reached with the EU with regard to these issues. Without such an agreement, we expect to see contingency plans being put into action in order to safeguard the continuity of contractual arrangements ahead of Brexit.