Over the past few months, we have seen a number of important developments to the progress of Brexit. With negotiations underway and our key trading partners rolling out their contingency plans, our clients are asking what Brexit will mean when it comes to doing business with us in the European Economic Area (EEA)1. In this bulletin we have prepared some useful pointers setting out Gallagher’s high level approach to Brexit with the intention to provide guidance to our clients.
What action is Gallagher taking in response to Brexit?
Until a trade deal and, possibly, a transitional period are fully agreed and ratified by the negotiating parties, political uncertainty will remain. As a business, we are planning accordingly. Because of this and in the interests of our clients, the Gallagher group is preparing for the scenario of a ‘hard’ Brexit and no transitional period.
To ensure the Gallagher group is prepared to face the many challenges posed by Brexit, a Brexit Programme and taskforce has been established. Part of the programme’s focus is to ensure that an appropriate business solution is effectively implemented within the timeframes dictated by political developments at UK and EU level. Our dedicated team is focussed on considering a range of options to allow our brokers to continue to place EEA sourced business.
Whilst we expect to be able to continue to provide services into and out of the EEA from the UK, we already have owned operations within the EEA, meaning the full range of options is open to us. We are also investigating the option of establishing a new legal entity of the Gallagher group in one (or more) EEA member(s) countries that would be authorised to conduct intermediation activities under the EU Insurance Distribution Directive and would benefit from passporting rights.
A due diligence exercise is currently ongoing to determine which jurisdiction will be commercially suitable in terms of legal, regulatory, tax, conduct and employment regulations. We expect a final decision as to the jurisdiction of choice to be made before the end of the summer.
Our key objective is to continue to provide a seamless service to our clients, post-Brexit. Minimising disruption to how we do business is key to our plans and we are seeking to minimise changes to our operating model and resourcing where possible. We expect client facing functions to remain broadly where they are now, however we may need to make some changes to trading and settlement processes and systems to ensure uninterrupted trading with our insurer partners who underwrite business with EEA exposure.
Our plans are also being developed around having maximum flexibility for as long as possible and we will continue to be adaptive and respond to Brexit terms as they evolve. This includes potential changes to timing and structure which are yet to be finalised by the Government.
What Plans Do Lloyd's And Other Insurers Have For Brexit?
Lloyd’s is setting up a fully capitalised insurance company (Lloyd’s Brussels Subsidiary – “LBS”) in Brussels that will be owned 100% by the Corporation. It is authorised and regulated in Belgium and licensed to write business throughout the EEA.
LBS will delegate authority to Managing Agents in London to underwrite business on its behalf. LBS will establish a UK branch, subject to authorisation from the Prudential Regulatory Authority (PRA) once the UK leaves the EU.
Brokers will be able to interact with Managing Agents for EEA business in much the same way as they do today. On global programmes, where agreement is reached, the client will receive two policies: one for the EU27 portion of the risk underwritten by LBS, and one for the rest of the world underwritten at Lloyd’s in the same way as today.
Lloyd’s intends to write all EEA business incepting on or after 1st January 2019 through LBS.
Premium and claims payments will be processed via the bureau services run on behalf of Managing Agents by DXC (formerly Xchanging).
Where else will insurers be based? Are they following the same model as Lloyd’s?2
We continue to liaise with all major insurers so we can understand their intentions. There are two key common denominators that appear to be prevailing. Firstly, the issuance of two policies as referenced above for global programmes and secondly, that all underwriting decisions will continue to be taken in London.
In the event of two policies being issued, it is particularly important that careful attention is given to any aggregate limits and retentions that might have existed in what was previously a single policy. How will these now operate over two policies? Will all amounts be duplicated over both policies, in which case there are potentially negative implications for the carrier (a doubling of limits) and the policy holder (a doubling of retentions), or will there be a combined aggregate over both policies with perhaps a priority of payments clause? In any case, there are solutions, but care is needed.
If I have a contract in place when Brexit happens, will that be a problem?
Assuming that no agreement is reached by the UK and the EU-27 that would allow UK firms continued access to the Single Market after 29 March 2019, including the use of passporting rights for insurers and intermediaries, from that date the UK will become a third country from the EU perspective. Therefore the UK insurance market will lose passporting access to the EU single market and will instead be subject to individual member state rules for ‘third country’ access to financial services.
Should this happen, there is a risk that insurance contracts written prior to Brexit may become impermissible as a consequence of the UK leaving the EU. Contracts potentially at risk include those which have not expired at the point of Brexit, as well as contracts which have expired and on which claims become payable. In the absence of a political agreement between the UK and the EU27, whether a contract becomes impermissible will depend on the type of business and the insurance regulation of specific EEA countries.
It is possible that this risk will not materialise either because a transition deal is agreed which ensures existing contracts are permissible, or individual EEA countries confirm that existing contracts are permissible. However, we are committed to ensure clients continuity of services should this risk materialise and we are working on a contingency plan to mitigate such risk, as detailed above.
In the event of a “hard Brexit”, UK based insurers will lose passport rights and could not be adequately licensed to write EEA business. We are committed to ensure that business is placed with insurers licensed to carry on business in EEA states, where the location of the customer or risk requires that. As such, we are working closely with carriers to ensure their new status and model is reflected in the trading process.
We are monitoring our trading partners’ contingency plans and are actively engaging with them on a 1:1 basis. We remain confident that all underwriters will be very keen to perform the contractual obligations they committed to at inception of the policy as it defies the logic of protecting consumer interest were an EU27 government to enforce such laws that prevented the payment of a valid claim to a consumer. Regardless, we shall be very robust in seeking to enforce those obligations upon underwriters.
Gallagher, along with both the broking and underwriting trade associations, continues to lobby hard that contract continuity should be agreed as part of the exit deal.
Will insurers be transferring liabilities to their EU subsidiaries and what are the implications?
We understand that a number of insurers are proposing to carry out what is known as a “Part VII transfer” of liability to any new EU based entity. This will vary from insurer to insurer e.g. Lloyd’s will not be doing this but we know AIG, W R Berkley and Markel intend to. AIG has already issued communications about restructure plans which consist of a transfer of their EEA business portfolios from AIG UK to one of their two new entities: AIG Europe SA, based in Luxembourg (EEA business excluding UK), and American International Group UK Limited (AIG UK) (UK business). The proposed transfer is subject to regulatory approval.
Where this transfer is carried out, insurers are legally obliged to write to all affected policyholders setting out how their rights may be affected. This could mean several, reasonably bulky, letters from insurers that detail these changes although much of this administrative headache will largely sit with brokers and underwriters acting on behalf of their clients.
Other insurers have indicated that they are not planning to transfer liabilities via a Part VII but are re-domiciling their EU headquarters. For example Chubb is relocating to France and has announced that the new structure will be in place in sufficient time for renewals incepting on 1 January 2019. Also Lloyd’s Brussels subsidiary will be operationally ready from July 2018 and able to write business from 1 January 2019.
I have a captive that writes EU business. What do I need to do?
The issues for insurers around matters like capital adequacy and appropriate licences for policy issuance, are more complex than they are for brokers. Gallagher has a wholly owned specialist captive management operation called Artex. We suggest you work closely with them as they are able to provide qualified detailed advice. You can contact Artex through either your normal Gallagher representative, or if you prefer, via Steve Quinn or Nick Heys at Artex directly on +44 (0)1481 737100.
Will London’s status as the leading global insurance hub be undermined by Brexit?
The London market underwrites and manages in the region of $90 billion of premium per annum, to which amount the EU27 contributes approximately $12 billion. This is a meaningful proportion but needs to be viewed in the context of the vast majority of business that comes from elsewhere. Even in the extremely unlikely event that London was to lose all its EU27 business, it would not in itself fundamentally undermine London as a world-class, global insurance market.
London benefits from a cluster of expertise that makes it unique and results in 350 firms located within 500 metres of Lloyd’s that employ more than 50,000 people. We are encouraged by the fact that insurers intend to keep underwriting decision-making in London. This will help preserve the cluster that is so important in providing the depth and breadth of expertise that has made London so attractive for so long.
Does the London market lobby the Government?
The London Market Group (LMG) represents four key market constituents – the International Underwriting Association of London (IUA), Lloyd’s, the Lloyd’s Market Association (LMA) and the London International Insurance Brokers Association (LIIBA). Lobbying has been going on since immediately after the referendum and is encapsulated within the LMG publication “A Brexit roadmap for the UK Specialty Commercial Insurance sector.” Gallagher is represented in this group through our membership to LIIBA
Currently, the principal thrust revolves around three dominant themes -
- A solution to the issue of contract continuity. Currently it is unclear as to whether it will remain possible to service contracts – and particularly pay claims – that run over the date on which UK exits EU. This must be resolved as our clients are not to be the unintended victims of the Brexit process.
- An appropriate transition period post Brexit that will maintain our ability to renew and place business in the optimal location for our clients3.
- A Free Trade Agreement between UK and EU that will allow for mutual market access. This will ensure that EU clients continue to be able to access the specialty expertise in London.
If you have any questions please get in touch with your usual Gallagher representative.
1 In this document EEA (“European Economic Area”) refers to EU (“European Union”) plus the three EEA member states (i.e.: Norway, Iceland and Liechtenstein)
2 All the information related to carriers’ relocation plans is based on publicly available sources such as their websites. Further information can be found at www.ferma.eu
3 A political deal on a post-Brexit transition period was reached by the EU-27 on March 2018. This is not “legally binding”. As transitional agreements will form part of the Withdrawal Agreement, they are assured only once the Withdrawal Agreement is agreed (expected October 2018) and ratified (by March 2019). This would translate into an extension of the existing rights and obligations for the UK’s membership of the EU until 31 December 2020, including EU passporting rights.