Brexit: no deal, no problem for insurers

The Brexit treaty continues to cause trouble. The Northern Irish party DUP now wants to take legal action against the deal. The partnership agreement between the EU and Great Britain does not contain a trade agreement for the insurance industry. What are the consequences of this? An analysis of Olaf Seidel and Frank Püttgen.

Following the UK’s withdrawal from the EU on January 31, 2020 and the end of the Brexit transition period on December 31, 2020, the partnership agreement concluded between the EU and the United Kingdom at the last minute came into force on January 1, 2021 . On both sides of the English Channel, the last-minute deal has been valued by policymakers as a far-reaching trade agreement negotiated in record time and a great success. In fact, the agreement on future relations in the field of trade in goods contains a free trade agreement that at least does not provide for tariffs and quotas.

In addition to the area of ​​goods traffic, both sides have agreed on regulations that serve to ensure fair competition. This applies, for example, to the area of ​​state aid, standards in consumer and employee protection as well as the environment and climate. The regulatory content of the agreement also extends to the areas of services and investments, which also includes the insurance industry. Apart from the basic rules for fair competition, the content here is manageable.

In view of the changed market access requirements, the Financial Services Contracts Regime (“FSCR”) and the Temporary Permissions Regime (“TPR”) came into force in the United Kingdom with effect from January 1, 2021. The FSCR enables the EU and thus German insurers to continue to fulfill and process existing insurance contracts in the UK for a transition period of a maximum of 15 years, even without full approval in the UK. A premature termination or settlement of existing insurance contracts with policyholders in the UK or any other risky matter in the UK is avoided and the proper run-off is ensured.

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The TPR, which runs until December 31, 2023, serves to ensure a seamless transition from EU approval to the full approval of a third country branch or a new insurance company in the UK by the Prudential Regulation Authority (“PRA”) and the Financial Conduct Authority (“FCA”).

Consequences for UK insurers in the EU market

Since the Solvency II Directive does not contain a (comprehensive) harmonization of access for insurers from third countries, the market access rules for UK insurers in the EU countries differ from one Member State to another. For Germany, the Federal Financial Supervisory Authority (“BaFin”) published the general decree on December 31, 2020 for the implementation and processing of the cross-border activities of insurers and institutions for company pension schemes based in the United Kingdom of Great Britain and Northern Ireland and in Gibraltar.

In summary, BaFin has made the following arrangements: UK companies that have been conducting insurance business in Germany up to the end of December 31, 2020 do not require BaFin’s permission to continue and process their existing business. However, the primary insurance contracts concluded up to this point in time must be terminated immediately if and as soon as this is legally permissible. Insurance contracts and terminated primary insurance contracts must be fully processed on the basis of the contract conditions. Insurance contracts that have already been terminated by December 31, 2020 must be processed in full on the basis of the contract conditions.

In addition, BaFin has ordered that the processing of the existing business is permissible despite the possibility of termination until the conclusion of the transfer of the insurance contracts to an insurance company approved to operate insurance business in Germany or in the EU / EEA or to a third-country branch approved in Germany, if the Transfer process was initiated by the end of December 31, 2020.

Finally, the informal transmission of certain documents / data is ordered by BaFin for the entire duration of the implementation or processing of the insurance contracts by a primary insurance company. The order of BaFin, which the UK insurers do not
If a further transition period is granted, it is comparatively strict in direct comparison to the legal situation in the UK – according to which there is a 15-year processing period for EU insurers and a three-year Temporary Permissions Regime for the UK.

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German insurers are well prepared

It goes without saying that Brexit made access to the respective insurance markets more difficult. Nothing else was to be expected. The market access of insurers from third countries to the EU internal market cannot be subject to lighter regulations than those that apply to EU insurers. Overall, the German insurance industry should be well prepared for Brexit. The “compulsory abstinence” of some market participants from the United Kingdom also creates business opportunities for German insurers and insurers from other EU countries when it comes to hedging risks in other EU countries.

Capacity bottlenecks should be compensated for within the EU, at least in the medium term, especially taking into account reinsurance solutions (see also our interview in VW today from December 21, 2020). In terms of industrial policy, we would like to see legal parameters that would allow even significant, internationally oriented financial service centers to continue to establish themselves in the EU as the world’s largest single market.

Authors: Olaf Seidel, KPMG, FS Management Consulting, and Frank Püttgen, KPMG Law, FS Legal Insurance

You can read the full article in the current February issue of Insurance industry.



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