No-deal Brexit could leave EU insurers in limbo: O’Connell

Brexit could yet cause insurers and reinsurers in the UK and the EU a number of problems including a drain of talent and intellectual property from London, and firms ending up in limbo, in the increasingly likely case of the UK’s leaving the EU without a deal.

That is according to Clive O’Connell, partner and head of insurance and reinsurance at McCarthy Denning, who told Monte Carlo Today that while most UK re/insurers have made contingency plans for Brexit, usually by forming a subsidiary in an EU country, many EU-based players have not.

There are more than 700 European re/insurers doing business in the UK using the passporting arrangement. Ideally, such companies would work with the Prudential Regulatory Authority (PRA) to use Part VII of the Financial Services and Markets Act (FSMA) insurance business transfers to establish a UK subsidiary.

That process takes three years on average and many did not start the process, instead hoping for a deal between the UK and the EU.

In March, the European Insurance and Occupational Pensions Authority (EIOPA) agreed Memoranda of Understanding (MoUs) with the Bank of England and PRA that basically agreed to honour the status of such companies for two years in the event of a no-deal Brexit.

O’Connell points out that this still causes a big issue for these companies given the PRA’s turnaround time on the authorisation of new subsidiaries and Part VIIs.

“Most UK re/insurers are prepared for the worst and have formed European hubs but the same has not happened the other way around,” he said.

“There are a large number of European companies operating here under passporting arrangements. If all those companies struggle to get authorised, that could cause a capacity issue in the market.”

He added that, depending on the outcome of a deal and future regulatory requirements, some UK reinsurers could also end up in a position where they are required to post collateral when working with cedants in regions including the EU, the US and Japan.

This could become a big talking point later in the renewals, he said, if a no-deal Brexit becomes a reality.

“We could see European insurers rejecting UK security without collateral, although it will not happen the other way around as the Bank of England has said it will respect European reinsurers’ security,” he explained.

O’Connell added that London risked losing talent and intellectual property as re/insurers that now have hubs in Europe may choose to use them as launchpads for new products and innovations—rather than London.

“They need good people on the ground making decisions in these offices and that will inevitably gain momentum over time. It would be a shame for London but that is a real risk in years to come,” he concluded.