The Brexit deal struck in December 2020 between the UK government and the EU does not directly cover financial services. This has implications for policyholders particularly with regards to motor insurance but also potentially for contract continuity as well as risk placement.
On 31 December 2020, the Brexit transition period ended and the UK insurance market lost its ability to trade freely across the European economic area (EEA). The loss of passporting rights into the EEA means that in order to continue to service EEA clients, insurers and brokers had to set up and/or transfer existing insurance contracts to EU-based subsidiaries.
Around 27 million insurance contracts have been transferred to the EU from the UK, carrying jobs and business with them. An estimated 35 new insurance subsidiaries have been set up in the EEA since 2016 to work around the withdrawal of market access via passporting. While insurers can still utilise their expertise and underwriting capacity in London, operating via two separate insurance companies, this is less capital-efficient and more costly. Nevertheless, insurers are unlikely to issue additional fees to clients to recover those costs.
Consequences for policyholders
• Motor insurance
UK motorists driving in EU states will need to have a green card issued by their insurer, or in some cases, by their insurance broker. This is an issue particularly for Northern Ireland, where cross-border trips are more regular. Each vehicle, trailer or wagon needs a separate green card to travel across the border. Crossing the border to the EU without a green card would be breaking the law, as the driver would not have the mandatory liability cover in case of an accident. As a consequence, the vehicle could be confiscated and the driver could face criminal proceedings. It is recommended to check if a rented vehicle has a green card. The UK has waived EU drivers’ requirement to carry a green card in the UK but this has yet to be reciprocated by the EU.
• Contract continuity
Since insurers lost their passporting rights to access EU markets, contract continuity is an area that lacks clarity. Without a credible Brexit solution that addresses the loss of passporting rights, regulators in the EU could prohibit the payment of a claim on pre-Brexit policies by unauthorised insurers. Theoretically, it could be illegal for a UK insurer to pay a pension policyholder in France. Ireland has introduced a 15-year run-off period for existing contracts.
• Split policies
While some insurers retained their ability to issue a combined insurance policy covering EEA and UK risks at renewal, others are now issuing two separate policies. As a result, policyholders may potentially face issues related to minimum premium requirements. Negotiations may also get a little tougher at renewal in the current hardening market, as insurance margins remain under pressure due to the impact of Covid-19 and Brexit.
However, procuring cover for EEA assets separately can also be advantageous for insurance buyers due to additional competition, but brokers will need to work harder to keep costs low.
Policyholders should contact their broker/insurer to make sure that their EEA assets remain covered, not least because some players decided to stop underwriting EEA risks altogether.
Companies without assets in the EEA that trade with EEA may need to engage with their broker/insurer to clarify the existing cover for product recall insurance, for example.
Lockton can still present a single proposal to the market but insurers might decide to split the cover. Two different policies can carry differences in wordings but the market is generally keen to ensure there will be as few changes as possible. Nevertheless, there may be issues for interlocking cover with limits split across policies. Insurers and brokers will need to ensure that policies react in the expected way. Policyholders should request a clear response from their broker and insurer, and not make assumptions around the extent of coverage.
• Regulatory changes
Brexit may interrupt the movement of data across borders and the UK will need a long term agreement on data security after the existing four-month extension to current arrangements on transfer of data across borders expires. The aim would be to achieve an adequate agreement on data in the second quarter of 2021.
Some market observers see an opportunity for the UK to review the Solvency II (SII) prudential regulation regime post-Brexit. This could reduce the need for capital reserves and therefore costs for insurers. Ultimately, this could also benefit policyholders. The SII regime could potentially be reformed to maintain the principles of prudential regulation while removing some of the excessive burden on UK insurers.
The Lockton approach
Lockton is operating in the EEA via Lockton European Brokers Limited [LEBL], based in Malta, with a UK branch in London. Malta has the advantage that English is widely spoken, the commercial legal system is similar to the UK’s and that there is an attractive talent pool.
From 1 December 2020, all EEA new business and existing clients have been renewed via LEBL. The solution allows existing associates in London to continue to help servicing their EEA clients and place risks into the London market, with certain activities such as documentation, invoicing, instructions and advice being carried out by the LEBL team in Malta. Where locally admitted covers are required within the EU, Lockton will continue to utilise its network of partner brokers.
Summary
Insurers will now have to manage UK and EEA placements separately as documentation requirements differ. A broker must be regulated within the EEA or pass any EEA exposures to a registered broker to continue to intermediate on an EEA exposure on behalf of a client.
The UK’s trade deal with the EU does provide a good foundation for positive future cooperation between the UK and its European partners. The stated aim is to create a memorandum of understanding (MoU) by March 2021, which would include equivalence assessments. While an MoU is not as formal as an agreement, there is hope that this will resolve outstanding issues such as an agreement on the UK’s continued participation in the motor ‘green card-free’ circulation zone.
You can find further information on these and other consequences of Brexit for the insurance industry in a recent Lockton organised webinar here (opens a new window).
