BREXIT – Impact and consequences for the insurance industry

On 23 June 2016, the majority of the United Kingdom’s citizens voted in favour of the UK leaving the European Union. While large parts of England and Wales voted for Brexit, Scotland, Northern Ireland and in particular Greater London voted in favour of remaining in the EU. Besides the political impact on the European idea and the current discussions on future cohesion within British society, the consequences for the British economy and the European Economic Area and its relations with the UK are also being discussed. It is already without a doubt clear that the financial market London will bear the brunt of a Brexit. London is the world’s most important marketplace for banks and insurers, the City offers global companies and their European headquarters unrestricted access to the national economies of the EU via the “EU passport”, and does so for the insurance and financial services industries, which are subject to especially intensive regulation.

With this article we would like to inform you about the possible legal impact a Brexit could have on the insurance industry, both for German primary insurers and reinsurers, and for insurance brokers who operate in the City, the companies based there and their business activities in Germany.

1. Possible alternatives for the UK’s withdrawal from the EU

The United Kingdom’s withdrawal from the EU could be implemented in various ways. The possibility for a withdrawal of a Member State is in principle expressly provided for in Article 50 of the TFEU. This provision, however, remains rather vague with respect to the exact procedure. There is not yet any practical experience of its application either. Various different withdrawal mechanisms are conceivable and the type and scope of the new trade agreements the EU and the UK will enter into is ultimately unclear. But one thing is already obvious today: the new relationship between the UK and the EU and third countries is going to take some time to establish and will therefore lead to legal uncertainty for the companies affected. It is therefore no surprise that some well-known insurance groups expressed their intention prior to the referendum to relocate their European headquarters to continental Europe.

Several Brexit scenarios are theoretically possible, three of which are to be considered more closely. Firstly, the UK could comply with the requirements of Article 50 (2) of the TEU and notify the European Council of its intention and then enter into negotiations on a withdrawal agreement. It would, however, also be possible to enter into negotiations with the European Council before the official procedure commences and submit the official notification after the negotiations have been completed. This procedure could lead to the fact that a new referendum on the withdrawal in accordance with the negotiated terms might be considered. The possibility in theory also exists that the UK terminates its membership unilaterally and eliminates the precedence of EU law from its statute books. This alternative is not, however, realistic due to the political consequences and the repercussions under international law triggered by such an approach.

The decisive factor will be whether and how the UK enters into a withdrawal agreement with the EU, in which future economic cooperation and collaboration between the EU and the UK is regulated. Whether the UK will, like Norway or Switzerland, pursue membership in the EEA of EFTA is conceivable and is already being discussed. Membership in the EEA means free access to the internal market, with the four fundamental freedoms of the internal market remaining in force and a majority of EU’s internal market regulations continuing to apply for the EEA member countries. Unfavourable and politically undesired by both the UK and the EU is the fact that the UK would no longer have a right to any say in EU policy, but would nevertheless have to make substantial payments. It would therefore be more logical to structure relations with the EU in a manner similar to Switzerland. EFTA is to seen as a free trade zone, i.e. the fundamental EU freedoms and EU regulations no longer apply, and instead a large number of sectoral agreements have to be entered into to regulate economic relations in the individual industrial sectors. Corresponding agreements for example exist between the EU and Switzerland for the insurance industry. The European supervisory authority EIOPA, for example, recently acknowledged Switzerland’s solvency standards, the “SST”, as being equivalent, making business activities easier in both directions.

2. Insurance company investments

For insurance companies, the initial impact of a Brexit is purely financial since investments are held which are located directly in the UK or whose performance is indirectly linked to the UK’s economic climate. These adverse effects have unfortunately already been reflected in the share prices of several major insurance companies in recent days.

3. Regulatory impact

It is very likely that the UK would as the result of a Brexit lose direct access to the EU internal market. The fundamental EU freedoms would no longer apply, which would make it much more difficult for British companies to access the internal market with its population of over 500 million people. British insurers, i.e. both British insurers and the European headquarters of third-country insurers, would no longer be able to simply open branches in EU Member States. The provision of cross-border services would also become much more difficult or even impossible. It would therefore be necessary and make sense for UK insurers or third-country insurers to establish licensed insurance companies in the remaining EU countries, from which they would then via the “EU passport” have access to the fundamental freedoms, i.e. freedom of establishment and freedom to provide services in the EU. In terms of insurance supervision and company law, this would mean major restructuring for many companies involving high costs. Since free movement of capital and freedom of payments would no longer apply, reciprocal investments between the UK and the EU would also be hindered. It would also be more difficult to repatriate profits.

It is not to be assumed either that the UK will depart entirely from the European Solvency II regulatory regime. On the one hand, British insurers have already implemented the applicable European standards, i.e. the associated costs have already been incurred. On the other hand, the British supervisory authority has already made it clear that it would advocate regulatory requirements which are stricter than Solvency II. The decisive factor is, however, likely to be that the British insurance industry will only then have a real chance of playing a continued significant role in the world of insurance if it commits to the existing regulatory standards and is therefore, like Switzerland, accepted as an equal partner under bilateral agreements.

The United Kingdom’s withdrawal from the EU is ultimately likely to mean that, as announced by some global insurance groups prior to the referendum, European headquarters will be relocated from London to continental Europe. Where previously the entrance ticket for market participants was the “EU passport” issued to the insurance company in London and for the branches in the individual Member States, this fundamental freedom and therefore this simplification will in future no longer apply. It is instead to be assumed that in the near future several insurance companies will apply for a licence in continental Europe. It is essential that the local supervisory authorities and in particular BaFin, the German Financial Supervisory Authority, then make the licensing process quicker than it has been to date, not least in the interest of Germany as a business and insurance location.

4. Contractual amendments

A Brexit will also impact the structure of insurance contracts. Changes could first of all result with respect to applicable law. If for example an insurer concludes an insurance contract with a policyholder who has his habitual residence or domicile in an EU Member State and the insurance contract does not cover any large risks, in the absence of a choice of law the insurance contract is governed by the law of the country in which the insurer has its habitual residence/domicile, in accordance with Article 7 of the Rome I Regulation (Regulation (EC) No. 593/2008). A choice of law is only permissible within the limits established by Article 7 (3) of the Rome I Regulation. If the policyholder on the other hand has his habitual residence/domicile in a third country, the parties can choose applicable law freely. If the parties have not chosen applicable law, the law of the country applies in which the insurer has its habitual residence/domicile. If a German insurer concludes an insurance contract with a customer in the UK after the UK withdraws from the EU, the parties can therefore choose applicable law freely. If applicable law has not been chosen, German law would apply.

The German Insurance Contracts Act refers in several places to EU law. EU law would, however, no longer apply for the UK once it has left the EU. National law would then apply exclusively in the UK. This can, for example, impact the categorisation of a risk as a large risk. Whether a large risk exists can depend on factors such as the size of the policyholder’s company. The figures in the consolidated annual financial statements are decisive for determining the size of the company if the company has to prepare consolidated annual financial statements in accordance with Sec. 290 of the German Commercial Code, Sec. 11 of the German Public Disclosure Act or in line with the requirements of Directive 2013/34/EU of the European Parliament and the Council of 26 June 2013. As a result of a Brexit, this regulation will then in principle no longer apply to UK companies.

The impact of a withdrawal from the EU is also apparent in connection with regulations governing health insurance. Pursuant to Sec. 207 (3) of the German Insurance Contracts Act, the health insurance contract continues if a person relocates his habitual residence to another EU Member State or an EEA country. This will no longer apply in future if the policyholder relocates his habitual residence to the UK.

5. Data protection law etc.

A Brexit will also have an impact on areas beyond insurance law. This especially applies to data protection law. The German Federal Data Protection Act, for example, does not apply if a controller of another EU Member State/EEA country collects, processes or uses personal data in Germany, without the data collection, processing or use being carried out by a branch. If on the other hand the data is collected, processed or used in Germany by a controller which is not located in an EU Member State/EEA country, the German Federal Data Protection Act applies (Sec. 1 (5) of the German Federal Data Protection Act).

Social legislation is also affected. The provisions of EU social legislation in principle only apply for EU citizens, not for nationals of third countries. For nationals of third countries and their relatives, however, Regulation (EC) No. 883/2004 of the European Parliament and of the Council of 29 April 2004 for the coordination of social security systems in accordance with Regulation (EU) No. 1231/2010 applies if the national of the third country resides in an EU Member State and a cross-border element with another EU Member State exists. Since the UK did not adopt Regulation (EU) No. 1231/2010, the Regulation did not apply in the UK anyway. Changes result, however, due to the fact that the UK will take on the status of a third country due to a Brexit. The extent to which periods of employment in the UK will then have to be taken into account for a German pension will depend on the agreements which the EU and the UK conclude as a result of a Brexit.

The above consequences are merely examples. A Brexit will also impact areas such as tax law and employment law.

6. Conclusion

The actual consequences of a Brexit are already apparent. Investment assets whose performance is linked to the economic situation in the UK, which will remain uncertain for the foreseeable future, are already experiencing the negative effects.

The legal impact of a withdrawal of the UK from the EU will depend on the redefinition of the relations between the EU and the UK and remains to be seen. The legal uncertainty which will exist until this time is, however, very likely to prompt many global insurance groups to already relocate their European headquarters from London to continental Europe. This is probably the only certain way to ensure unrestricted access to the internal market of the EU, also in regulatory terms.

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