Will your insurer be able to pay claims post-Brexit?
In the continuing absence of any alternative solution, passporting rights between the EEA and the UK will cease after Brexit. As such, unless alternative steps are taken, a "no deal" Brexit scenario will leave insurers without the necessary permissions to perform their obligations, including paying claims cross-border.
This article considers the potential use of "contract continuity" clauses in insurance policies in force after 29 March 2019 ("Exit Date") as a means of mitigating against post-Brexit uncertainty and what policyholders should be doing to safeguard their businesses.
What is "Passporting"?
Currently, EEA (re)insurers are able to provide insurance to UK and other EEA policyholders and UK / EEA re(insurers) are able to provide insurance to EEA policyholders by virtue of "passporting" – a regime built upon the assumption that financial services firms authorised anywhere in the EEA meet the same standards and should therefore be treated as if they were locally authorised (they obtain a financial services "passport").
These passports are not available to firms incorporated outside the EEA – such firms are known as "third country" firms which face significant regulatory barriers to provide services to customers. If the UK leaves the EU without a deal to the contrary, the UK will become a "third country" firm to the remaining EEA states and vice versa.
According to the FCA, loss of passporting rights could affect around 10 million policyholders and £27bn of insurance liabilities in the UK and 38m policyholders and £55bn of insurance liabilities in the EEA.
What is the situation for UK policyholders with an EEA insurer?
For UK policyholders with an EEA insurer, the UK government has offered reassurances in the event of the UK leaving the EU on the Exit Date without an implementation period. The government proposes to introduce a temporary permissions regime (TPR) whereby firms wishing to continue carrying out business in the UK in the longer term are permitted to operate in the UK for a limited period following the repeal of passporting rights whilst they seek authorisation from UK regulators. The government has published a draft statutory instrument establishing the TPR, which is to be laid under the EU (Withdrawal) Act 2018.
The TPR is intended to allow sufficient time for EEA insurers to obtain the necessary permissions so as to avoid any interruption to insurance business. Claims made by UK policyholders against EEA insurers within the TPR should, in theory, be handled as normal.
What is the situation for an EEA policyholder with a UK insurer?
The same security has not been offered by the EU to UK insurers. For EEA policyholders with a UK insurer, serious thought should be given to contract continuity post-Brexit.
In order to mitigate against the loss of passporting rights in respect of existing policies, some UK insurers have been transferring insurance portfolios to pre-existing or newly formed EEA subsidiaries / separate insurance companies. Transfers must take place under Part 7 FSMA which provides extensive protection to policyholders (but at high cost to insurers – which will potentially be passed on to policyholders in the form of increased future renewal premiums). Alternatively, UK insurers may seek authorisation as a third country branch in relevant EEA jurisdictions – a separate authorisation must be obtained from each jurisdiction in this case.
The FT reported that most large UK insurers have already executed contingency plans to ensure that they are able to honour cross-border contracts in a "no-deal" Brexit scenario. Admiral, Hiscox, RSA and AIG have undertaken laborious Part 7 FMSA transfers, whereas Chubb, Liberty Speciality Markets and the UK operations of Japan's Mitsui Sumito have turned their UK-based companies into an SE (a type of legal entity that is easy to transfer between EU member states).
There is a risk that not all UK insurers, however, will have implemented their transfer plans before the Exit Date and it is therefore likely that, if no deal is secured, some EEA policyholders will be left with valid policies but where the insurer cannot legally meet its obligations towards policyholders, in particular and most importantly its obligation to indemnify for a loss. UK insurers will be stuck between a rock and a hard place, with a choice of breaking their contracts or breaking the law.
It is important for risk managers to recognise the potential issues their businesses face and consider how their insurance policies can be amended / worded, by the inclusion of contract continuity clauses, to safeguard against Brexit risk.
Contract Continuity Clauses
Contract continuity clauses may be inserted into insurance policies to reflect insurers proposals to alleviate the effects of loss of passporting rights after Brexit (e.g. by transfer of the policy to an EEA subsidiary) and/or clearly setting out policyholders' rights in the event of a "no deal" Brexit.
Policies incepted since the Brexit vote may already include such clauses, but whether they are present or not, policyholders should consider what rights they will have (and what rights they may require) if their insurer is unable to perform its obligations and has no transfer mechanism in place.
By way of example, a non-exhaustive list of the types of issues policyholders should consider include:
- Whether, where an insurer proposes to transfer the policy to another entity, a policyholder can require that the replacement insurer meets minimum criteria. What happens if the policyholder does not approve of the transferee?
- Whether the insurer is obliged to notify the policyholder if no transfer has taken place within a certain period prior to the Exit Date to enable the policyholder to seek alternative cover
- Whether a policyholder is entitled to terminate the policy if the UK insurer is no longer permitted by law to perform the contract and is unable to transfer the policy (with a pro-rata return of premium).
The above list includes just a few examples of the types of issues policyholders should be alive to. Policy wording may be tailored (termination, claims handling and notification provision may be amended/added for example) to manage uncertainties in existing and new policies.
Whilst we appreciate that the imbalance of bargaining power that exists between insurers and an insured may make it difficult for policyholders to enforce changes in their policy wording, it is important, however, for the insurance industry to fully engage on this issue given the potentially wide ranging implications of a "no deal" Brexit for insurers and policyholders alike.
As a preliminary step, we recommend that policyholders engage with their brokers to understand any Brexit-related risks to which their insurance programme may be subject and consider their broker's recommendations on the same.
Naomi Hall is Solicitor in the Insurance and Reinsurance team and advising policyholder clients on coverage disputes and policy interpretation. Garbhan Shanks is Head of the Insurance and Reinsurance team which is ranked in tier 2 for policyholder insurance litigation in The Legal 500 2019. Garbhan is a Ranked Lawyer in Chambers and Partners 2019.