A few weeks ago, the legal basis for the United Kingdom, leaving the European Union, finally became law (bill authorising the Article 50 being triggered). One of the many questions that have been raised, revolve around the possible changes to the regulation of insurance in the United Kingdom and how prepared insurance firms are for these changes. There have also been questions as to whether the United Kingdom will seize to take part in the continued harmonisation process of regulating insurance which has been beneficial to the effective functioning of the European single market. So what exactly will the impact of Brexit be on the regulation of insurance business in the United Kingdom?
It has certainly been interesting to follow the debate as speculation continues to grow in relation to the extent of the impact. The key legal and regulatory issues that firms will have to consider will be determined by the model that will be negotiated and adopted by the UK.
The main concern for most insurers, reinsurers and insurance intermediaries has been that UK in-corporated and authorised insurance businesses may lose out from the benefits of the passporting system which has provided them with access to an EU market of at least 500 million people, with Lloyds having recently estimated that the London insurance market writes as much as £6bn of premiums.
A considerable number of analysts and commentators continue to express some optimism based on the fact that the UK has played a significant role in the way insurance has been regulated in Europe particularly with regards to Solvency II which recently came into force in the UK.
Solvency II has been of significance in terms of harmonising the regulation of insurance in the EU and focuses on concerns pertaining to the amount of capital companies must hold in order to reduce insolvency risk. It is widely known that Solvency II is heavily based on the UK’s previous risk based regime of regulation and therefore likely to be assessed as “equivalent” by the EU. It has been argued that adopting a regime in the UK that is to a large extent aligned with the EU regime, will make it possible for the UK to negotiate a deal that is favourable to the country thus allowing insurance companies to continue to operate under a regulatory regime that mirrors EU regulation.
It is important to point out that much of the law that is currently applicable in the UK is EU legislation in the form of regulations which are directly effective. Without considerable reform, the legal landscape appears to be uncertain unless the gaps that are left in the UK legal and regulatory frame work are filled.
The preservation of existing EU law into domestic legislation, has been one of the strategies being pushed forward to ensure coherence to the regulatory environment. The Great Repeal Bill which was put forward recently, initiates the process of taking back power from Brussels in order to repeal the 1972 Act which led to the United Kingdom becoming part of the EU. This means that thousands of pieces of EU law, will be put onto the British statute books to create certainty.
There are some arguments being put forward that this could also mean unpicking 40 years worth of law. On the other hand, there is a widely held view that there are likely to be very few changes that could be made particularly with regards to insurance regulation. What is likely to happen is that the laws will continue to be similar to those that apply in EU member states.
The fact that the process of restructuring the legal landscape may end up being long drawn, is not reassuring for those carrying out insurance business in the UK and wanting to continue to access markets in Europe.
It is however, clear that businesses are taking as many measures as possible in these uncertain times. With the world’s largest insurer Lloyds recently announcing the establishment of a subsidiary in Brussels, it is evident that organisations are bracing themselves for uncertain times ahead while the negotiations are ongoing.
The crucial question to ask at this point is: how will the regulatory processes be dealt with during the transition period as businesses would want to continue to operate in a less risky environment. There has been speculation of the possibility of businesses restructuring by moving operations to other countries within Europe as seen in the case of Lloyds of London.
Most firms are now in the process of reviewing their business structure by way of establishing the extent of their cross-border operations and their regulatory passports. This is also likely to involve being highly selective as to which jurisdiction they could establish a hub within the EU by taking into consideration issues such as the regulatory approach in the jurisdiction,availability of a skilled workforce as well as the tax regime applying to businesses in the jurisdiction. Other businesses in the insurance sector may consider alternative arrangements such as fronting or delegation rather than a full restructuring.
With many companies under pressure to protect the interests of shareholders, there is certainly going to be more action required to come up with more concrete solutions going forward.
Location: United Kingdom