EC published a notice addressed to insurance stakeholders on EU rules for insurance and reinsurance sectors in context of the withdrawal of UK from EU. Post Brexit, UK will be a third country with respect to the application of EU law and, therefore, the notice addresses the legal implications at the end of the transition period. The notice emphasizes that insurance and reinsurance undertakings need to be prepared for a situation in which UK loses its equivalence status in EU. The notice also highlights that, after the end of the transition period, the EU rules in the field of insurance and reinsurance—particularly the Solvency II Directive 2009/138/EC6 and Directive 2016/977— that set out the framework governing the activities of insurance and reinsurance undertakings across EU, the protection of policyholders, and the distribution of insurance products will no longer apply to UK.
The Withdrawal Agreement provides for a transition period ending on December 31, 2020. Until that date, EU law in its entirety applies to and in the UK. During the transition period, EU and UK will negotiate an agreement on a new partnership. However, it is uncertain whether such an agreement will be concluded and will enter into force at the end of the transition period. Regardless, such agreement would create a relationship that will be very different from the participation of UK in the internal market. Moreover, after the end of the transition period, UK will be a third country with respect to the implementation and application of EU law in the EU member states. Therefore, all interested parties, and especially economic operators, are being reminded of the legal implications that the end of the transition period will have on their activities.
In the notice, service providers in the field of insurance and reinsurance services and insurance distribution are being advised to assess the consequences of the end of the transition period, duly inform their EU customers, and take appropriate and timely action, which could include the transfer of contracts and/or activities to EU. This has the following consequences:
- UK insurance undertakings will no longer benefit from the Solvency II authorization to provide services in EU, as they will lose the EU passport and will become third-country insurance undertakings. This means that those insurance undertakings will no longer be allowed to provide services in EU, including through online sales, on the basis of their current authorizations.
- Branches of UK insurance undertakings in EU will become branches of third-country insurance undertakings. They will need an authorization in the member state of their activity to be able to continue to do business and have to comply with the conditions set out in Article 162 of the Solvency II Directive. The authorization of a branch, however, does not grant the right to conduct business across EU, but only in the member state that has granted the authorization.
- EU subsidiaries can continue to operate as EU insurance undertakings on the basis of their authorization in the member state of establishment and subject to their compliance with the EU rules, including in terms of solvency, governance (notably risk management and outsourcing) and disclosure requirements.
- According to the Solvency II Directive, UK reinsurance undertakings will be subject to the conditions set by the EU member state in which they conduct their activity. These conditions cannot be more favorable than those applying to reinsurance undertakings from EU, but they may be less favorable and may well differ between EU member states: for example, member states are free to require the pledging of assets or the establishment of a branch by the UK reinsurance undertakings. EC is empowered to declare the UK framework equivalent, which results in treating reinsurance contracts concluded with undertakings having their head office in UK in the same manner as reinsurance contracts concluded with undertakings authorized in accordance with Solvency II. Although the assessment of UK’s equivalence in this area is ongoing, the assessment has not been finalized. UK reinsurance undertakings thus have to prepare for a situation with no equivalence.
- The loss of EU authorization may affect the ability of UK insurance undertakings to continue performing certain obligations and activities and ensure service continuity with regard to contracts concluded before the end of the transition period. According to the Solvency II Directive, firms are required to take measures to ensure that contracts can continue to be serviced. To this end, firms should assess the implications of the end of the transition period on their operations and contract portfolios and should identify and mitigate risks in cooperation with the relevant national supervisors.
- According to certain provisions in the Solvency II Directive and Directive 2016/97, policyholders or customers should be informed about the impact of the end of the transition period on their rights and on the provision of insurance services, including the upcoming loss by the relevant insurance undertaking or intermediary of its EU authorization.
- According to the Solvency II Directive, insurance and reinsurance undertakings operating in EU as part of a group with the parent undertaking registered in UK will be subject to the Solvency II provisions empowering EU supervisory authorities to require a worldwide group solvency or to apply other methods aiming to ensure appropriate group level supervision including the establishment of a holding company with head office in the EU.
- In addition, any group-level internal model covering a UK group operating in EU, approved by the UK PRA before the end of the transition period will no longer be recognized in EU after the end of the transition period and will require a new application and approval by an EU supervisor. Any entity-level internal model for a subsidiary of an UK insurance undertaking established in one of the EU member states and approved by the supervisor of that member state will, however, remain valid.
- Insurance and reinsurance intermediaries registered in UK will no longer benefit from their registration rights under Directive 2016/9716 and will, therefore, no longer be able to conduct business in EU on the basis of their UK registration.
Keywords: Europe, EU, Insurance, Brexit, Solvency II, Group Supervision, Insurance Contracts, Authorization, Equivalence Regime, PRA, EC
Previous ArticleECB to Supervise Significant Institutions in Bulgaria and Croatia
BCBS is consulting on the principles for operational resilience and the revisions to the principles for sound management of operational risk for banks.
The Financial Stability Institute (FSI) of BIS published a brief note that examines the supervisory challenges associated with certain temporary regulatory relief measures introduced by BCBS and prudential authorities in response to the COVID-19 pandemic.
HKMA, together with the Banking Sector Small and Medium-Size Enterprise (SME) Lending Coordination Mechanism, announced a ninety-day repayment deferment for trade facilities under the Pre-approved Principal Payment Holiday Scheme.
The Advisory Scientific Committee of ESRB published a response, in the form of an Insights Paper, to the EBA proposals for reforms to the stress testing framework in EU.
MAS announced several initiatives to support adoption of the Singapore Overnight Rate Average (SORA), which is administered by MAS.
BoE updated the reporting template for Form ER as well as the Form ER definitions, which contain guidance on the methodology to be used in calculating annualized interest rates.
PRA published the policy statement PS19/20 on the final policy for extending coverage under the Financial Services Compensation Scheme (FSCS) for Temporary High Balance.
EBA published the final draft implementing technical standards for disclosures and reporting on the minimum requirements for own funds and eligible liabilities (MREL) and the total loss-absorbing capacity (TLAC) requirements in EU.
EBA published an erratum for the phase 2 of technical package on the reporting framework 2.10.
EC published the Implementing Regulation 2020/1145, which lays down technical information for calculation of technical provisions and basic own funds.