UK Insurers Make Plans for Passporting Rights Loss after Brexit

When the United Kingdom withdraws from the European Union, and at the end of any transition period, passporting rights that currently exist between the United Kingdom and the European Economic Area (EEA) are expected to cease.

UK-domiciled insurers that currently utilize the EEA passporting system to conduct cross-border business throughout the EEA will no longer be able to issue insurance contracts in the EEA once passporting rights are lost, according to an A.M. Best briefing, titled UK Insurers Prepare for Loss of Passporting Rights Post Brexit.

The rating agency said it is also possible that, in the absence of a political solution, UK-domiciled insurers will not be able to service existing EEA contracts by settling and paying claims. In the event of a "no-deal" Brexit, this could come into effect as early as March 29, 2019.

Catherine Thomas, senior director of analytics at A.M. Best, said, "Many companies have chosen to establish new EU subsidiaries. Meanwhile, small insurers that do not have the resources to create additional companies have formed relationships with local insurers that will be able to front business for them. A.M. Best expects rated insurance groups affected by Brexit to have these subsidiaries or arrangements in place by March 2019, ensuring that they are able to underwrite EEA business going forward, even in the absence of a transition period."

However, the report adds, the creation of a licensed EU subsidiary or affiliate does not address the issue that a UK insurer may not be able to service existing EEA contracts following a loss of passporting rights. It is the hope and expectation of the insurance market that a political solution will be found to this problem—for example, by allowing grandfathering of existing contracts. In spite of this, affected insurers are putting contingency plans in place and exploring their operational and legal ability to settle claims and provide other services to policyholders in individual EEA jurisdictions.

The majority of insurance groups that are affected by Brexit and rated by A.M. Best have either completed or initiated a transfer of their EEA business from their UK insurer to an affiliated EEA insurer under Part VII of the Financial Services and Markets Act 2000.

Yvette Essen, director of research with the rating agency, said, "However, the Part VII transfer process is expensive and time consuming, with transfers subject to extensive regulatory scrutiny and court approval. The process is further complicated if business has been underwritten on a Pan-European basis, as is often the case for large commercial clients, as it is difficult to separate assets and liabilities into UK and other EEA components. Consequently, a number of Part VII transfers will not be complete by the end of March 2019. In these cases, a transition period following the United Kingdom's withdrawal from the European Union is necessary to allow time for the transfer of policies to be completed."

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