United Kingdom

EU Client Brexit Update

This note is intended to provide EU domiciled insureds with an overview of some of the key points being worked through by the insurance sector due to Brexit, including:

  • UK insurers contract performance on policies with EU insureds
  • EU insurers insuring UK risks post Brexit
  • Lloyd’s Brussels
  • What clients should be thinking about with regards to their insurance policies
  • Aon’s preparations for Brexit

Insurance contract performance – What are UK insurers doing to prepare for Brexit?

The issue: In case of a no-deal Brexit, UK domiciled insurers will lose the authorisation to underwrite EU risks and perform their obligations across UK/EU borders, e.g. paying claims on insurance contracts underwritten pre-Brexit for EU domiciled insureds.

The response:

(a) Insurer response

Many insurers have been working on their Brexit plans for a long time. These have largely considered the worst-case scenario of a no-deal Brexit.

The most common plans involve:

  • A legal transfer of insurance contracts to an EU domiciled entity under Part VII of the Financial Services and Markets Act 2000. In this case the receiving EU domiciled entity will take over all obligations from the UK entity and is fully authorised to perform the contract.
  • A transfer of domicile of the insuring entity from the UK to the EU, typically a Societas Europeae (S.E.) is chosen for this purpose. In this case the UK domiciled entity simply moves its domicile to the EU and becomes fully authorised to perform its obligations there.
  • Continuing operations in the UK by using a UK branch of an EU domiciled entity. In this case, the insurer maintains its pre-existing authorisations to insure business domiciled in the EU and has UK permissions for its branch operations.

Under these scenarios, neither you, nor your broker are required to do anything further for the receiving EU domiciled entity to write new business or preform obligations under policies already underwritten.

Aon has monitored the insurer Brexit planning landscape for months and is conducting working sessions with all the major insurers, to understand their position in the event of a “hard” or “no deal” Brexit. Although we have not independently verified the completeness or efficacy of their plans, from these conversations we understand that the majority are comfortable that they have appropriate plans in place. Where we have not been able to ascertain likely insurer readiness, we will bring this to your attention.

Market selection remains a matter of client choice and we are of course happy to share with you the information that we have gleaned. You may also want to verify the position with prospective insurers directly. Your broker will be glad to discuss any questions you may have.

(b) Lloyd’s response

In respect of insurance contracts underwritten prior to the set-up of Lloyd’s Brussels (further detail provided below), Lloyd’s have decided to perform a Part VII transfer only with effect from 31 December 2020. For any EU claims obligations arising before that date, Lloyd’s has made a firm commitment to pay the respective claims to EU domiciled clients, notwithstanding the regulatory position and this underlines the awareness and commitment Lloyd’s has made to honour its obligations. For information on how Lloyd’s will deal with EU risks going forward, please see the paragraph on Lloyd’s Brussels below.

(c) Governmental response

EU authorities have an interest in ensuring that local insureds are protected and that local insureds receive the services and payment commitments they have contracted and paid for – notwithstanding their insurers preparedness for Brexit. EU authorities are at various stages in addressing their approach to such contract continuity:

  • The UK government has already taken this into account and has introduced regulatory regimes that ensure that UK clients can continue to have valid claims paid by EU domiciled insurers in any Brexit scenario (the relevant provisions are made in the Financial Services Contracts Regime and the Temporary Permissions Regime).
  • Other EU governments are discussing the issue, publishing preliminary position papers or are preparing specific legislation that will allow UK domiciled insurers to continue to perform their obligations in the event of a no-deal Brexit. We are monitoring developments and your broker will be glad to provide you with an overview.

EU insurers insuring UK risks in case of a no-deal Brexit – what should you consider in designing insurance programs?

The issue: In case of a no-deal Brexit, EU domiciled insurers will lose their passporting rights for the UK and will no longer be able to issue so-called Freedom of Services policies, that cover risks in the UK.

The response: From an EU perspective, in this case, the UK becomes a third country like many other jurisdictions around the world. This requires an analysis of the solutions available, which is the same as for any other global insurance program.

There are different solutions presenting themselves:

  • A local policy can be arranged within a global insurance program via a UK branch or a UK subsidiary of an EU program insurer. This is likely to involve some extra administration and cost for the parties involved.
  • Instead of local insurance cover, EU domiciled insurers can continue to insure UK risks for at least up to three years post 29 March 2019 if they have applied for recognition in the UK under the Temporary Permission Regime. This regime was created by the UK regulator to allow EEA authorised financial services firms currently active in the UK to continue their services without further need for a license for a period of up to three years after 29 March 2019 whilst applying for a permanent license as a third country domiciled entity. If the insurer has applied in this form, then no further changes need to be made to the existing or renewing policy.
  • Non-admitted coverage may be obtainable, where the insurer can continue writing the risk outside of the UK. However, this is not necessarily a problem-free solution as it may present issues with settlement of local insurance tax and the handling of local claims in the UK.

Each of these solutions can be a suitable way to address your risk protection needs. Please discuss this further with your account executive if you have any questions.

Lloyd’s Brussels – How is this different from Lloyd’s London?

On 1 December 2018 Lloyd’s Brussels (LICSA) started to underwrite the first EEA domiciled risks. The establishment of this entity is Lloyd’s response to the challenges Brexit poses for its UK based business model. LICSA is a separate entity from Lloyd’s of London, with its own risk capital and management structure. The interface to Lloyd’s of London is created via the fact that all risks underwritten by LICSA are directly reinsured by Lloyd’s syndicates in London.

For insureds using the Lloyd’s market, the main changes generated by the set-up of LICSA are:

  • Two separate risk carriers (Lloyd’s in London and LICSA) on the same policy (for global policies that cover both UK/Rest of World and the EEA).
  • Splitting exposures and premiums with interlocking clauses designed to ensure that this does not trigger any detrimental effects for the insured (for global policies that cover both UK/Rest or World and the EEA).

You should also note that Lloyd’s Brussels cannot underwrite any risk located outside the EEA.

Aon’s approach – What are we doing to prepare?

Aon has a well-established Brexit preparation programme. We are focused on doing all we can to avoid client detriment by ensuring, so far as possible, that our clients, partners and markets can continue to do business with minimal disruption to the way in which they do business today. We are focused on solutions that are not unnecessarily onerous, cumbersome or more expensive to our clients. To this effect our programme comprises:

  • Continuing to monitor insurer preparedness, including their choice of policy wordings and updating resulting broker guidance regarding what this may mean for new business, renewals, MTAs and claims so that we can share this information with clients when they come to selecting markets or making decisions about existing policies.
  • Establishing a UK branch of Aon Belgium BVBA, through which Aon can continue to serve all EU domiciled clients, providing them with continued access to the London market. The Aon Brexit team has been preparing this branch model for a number of months and it will be in place in the event of a hard Brexit.
  • Work streams to retain both EU national talent resident in the UK and UK national talent resident in the EU, reviewing our suppliers preparations for Brexit and implementing an intra-group data transfer agreement comprising so-called “Standard Contractual Clauses” to ensure personal data can continue to be transferred between our UK and EU businesses following the UK’s departure from the EU.
  • Interaction with associations and public bodies to advocate for the interests of our clients. Aon is engaged with various influential business organisations, industry bodies and lobby groups, including the UK and European Regulators, European Federation of Insurance Intermediaries (BIPAR), the London Market Group (LMG) and the London and International Insurance Brokers Association (LIIBA). These groups are all working on Brexit strategies and we are an active and key participant in these discussions.

What should you be thinking about, with regards to your insurance policies?

There are certain steps that you can take, with regards to your own risk protection needs, which include:

  • STEP 1: Confirm if any UK domiciled insurers have underwritten or participate in your existing insurance policies.
  • STEP 2: If there are UK domiciled insurers involved, confirm they have plans in place to ensure they can continue to underwrite and perform their obligations following Brexit.
  • STEP 3: Think carefully before either (a) selecting a prospective insurer; or (b) renewing a policy with an insurer that doesn’t have a clear Brexit plan in place.
  • STEP 4: Discuss any questions you may have about market selection, or your insurance policies, with your broker.