BREXIT and INSURANCE Report: What BREXIT Means For Insurers And Brokers Operating In Or Planning To

SAMPLE - EXTRACTS

SECTION 13 EU/EFTA INSURERS AND BROKERS WANTING TO DO BUSINESS IN UK AFTER BREXIT * The PRA has asked every insurer and bank writing EEA business to prepare a contingency plan for no deal. * Assuming that EU/EFTA firms lose passporting rights, then it is likely that EU/EFTA insurers already doing business in the UK may get a fast route to allow them to continue writing business but on a UK basis as a branch of an overseas insurer or with a fully capitalised UK subsidiary, * For existing insurers and brokers much will depend on what the FCA does or is allowed to do. * For insurers and brokers from a EU or EFTA country it is probable that they will have to set up UK branches or subsidiaries just as US and Asian insurers do now. * It is 99% certain that the FCA will retain Solvency 2 as a base. * For regulatory reporting purposes, it is likely that the UK will maintain a Solvency II based system of prudential regulation and that the UK system is likely to be assessed by the EU as an equivalent jurisdiction under Solvency II. EEA based insurers that write insurance business in the UK on a cross-border basis will need to obtain UK authorisation for UK branches or will need to set up a UK subsidiary with its own regulatory capital.

New subsidiaries New insurance subsidiaries will require operational substance to gain regulatory approval. Insurers and brokers will need to design and deliver a target operating model covering people, process, technology, governance and finance.

The UK is likely to require capital to be retained locally in order to meet solvency requirements. It will take legal entity governance seriously. It will require a minimum number of people-including senior staff-to be dedicated to the subsidiary, with the infrastructure to allow them to operate the organisation and serve their clients and trading partners. All of this must be considered at an early stage, to support the application process.

Given the scale of this change, it is a challenge for insurers and brokers to deliver in the timescales available.

Current passport holders

Inbound passport holders need confidence from UK regulators that they can continue to operate post Brexit. Unless continued access is negotiated, the ability to passport between the UK and other EEA states will be lost.

Insurance firms currently holding an inbound branch passport would therefore have to apply to the Prudential Regulatory Authority for authorisation in order to continue trading in the UK. Obtaining authorisation is a substantial process, and it would have to be largely completed before the outcome of Brexit negotiations is known.

SECTION 12 UK INSURERS AND BROKERS WANTING TO DO BUSINESS IN EU/EFTA AFTER BREXIT

Passporting rights * UK firms with branches in EEA countries will need to either obtain local authorisation for the branch or establish a subsidiary in the EEA (with its own regulatory capital) in order to write EEA business on a passporting basis. * UK Firms that currently write insurance business in an EEA country from the UK on a cross-border basis will likely need to establish a locally authorised subsidiary or branch to continue writing business on a cross-border passporting basis within the EEA.

Cross border transfers of business * Assuming that UK firms lose passporting rights, then it is likely that the UK will lose the automatic mutual recognition of insurance business transfers sanctioned by UK or EEA courts or regulators thereby making the process of re-organising books of business located in insurance companies and their branches in the UK and the EEA much more complex. * Brexit is likely to trigger the loss of automatic mutual recognition of insurance business transfers sanctioned by the UK or EEA courts or regulators, which is likely to entail the loss of the benefits of the EU Cross Border Merger Directive regime for transfers of assets and associated UK Court sanctioned schemes of arrangement involving the transfer of liabilities. * Both the UK and Ireland have implemented the EU Cross Border Merger Directive. * Pre Brexit UK firms will need to consider using the EU Cross Border Merger Directive Regime for proposed mergers and divisions of insurance business between UK insurance business and existing EEA business to be relocated in e.g. Ireland.

New subsidiaries New insurance subsidiaries will require operational substance to gain regulatory approval. Insurers and brokers will need to design and deliver a target operating model covering people, process, technology, governance and finance.

Each jurisdiction is likely to require capital to be retained locally in order to meet solvency requirements. All jurisdictions will take legal entity governance

seriously. They will require a minimum number of people-including senior staff-to be dedicated to the subsidiary, with the infrastructure to allow them to operate the organisation and serve their clients and trading partners. All of this must be considered at an early stage, to support the application process.

Given the scale of this change, it is a challenge for insurers and brokers to deliver in the timescales available.

Portfolio transfers Insurers also need to consider whether they need to transfer their back-book into the new company. This may be required for a number of reasons, including on-going permissions to continue servicing of insurance business, minimising frictional costs and ensuring the new company is profitable from day one.

A portfolio transfer adds additional complexity, cost and time to the process.

The main concerns are the capacity of the courts, regulators and independent experts to process the anticipated number of transactions, as well as the costs of policyholder communication, especially for personal lines business in life and non-life business.

Life and pensions For life and pension companies, Brexit is likely to have less of an impact on their core operations, which tend to be in domestic subsidiaries where they operate.

The exception is where a company has been selling products cross-border under passporting legislation. This includes business sold from branches of UK companies, as well as business sold back into the UK, e.g. offshore bonds.

With passporting looking unlikely to be an option post-Brexit, companies may need to set-up a new authorised entity in an alternative location to maintain access to markets. As with other new subsidiaries, these will take time to set up and require capital and operational substance, making it a strategic question of whether to invest further in these smaller but profitable businesses or re-evaluate the portfolio as a whole, including considering M&A and run-off options.

Regulatory equivalence There has been a huge lot of rubbish talked by politicians and the media, and even people within the insurance industry that we do not need full passporting rights like now but just some woolly equivalence of standards.

Equivalence under Solvency II does not give single market access rights and is not an alternative to the access arrangements the industry currently enjoys.

Solvency II gives no access rights to non-EEA insurers, which is why a new trading agreement is essential.

Equivalence to Solvency II would only mean that UK-based reinsurers representing 40% of the London Insurance Market’s EU business - would be treated in the same manner as reinsurers inside the EU by member states.

Solvency II helps to promote a number of the strengths of the London Insurance Market. These include a strong balance sheet; networks of international licences which facilitate access to markets and the ability to write global programmes including EU located risks; and an internationally wellregarded system of regulation that encourages transparency.

Two of the UK’s major competitors – Bermuda and Switzerland – are already Solvency II equivalent, and the US and EU have recently concluded an agreement that will promote the removal of regulatory barriers.

Clearly the UK will have a regulatory regime that is exactly equivalent to Solvency II at the point that it leaves the EU. The UK will need to maintain an insurance regulatory system that is broadly equivalent to Solvency II to underpin a new agreement with the EU. The EU will not permit UK undertakings to carry on business in the EU if there is a fundamental divergence in regulatory standards.

UK insurers need clarity that the UK supervisory regime will be accorded full Solvency II reinsurance equivalence immediately on Brexit to prevent a period of uncertainty.

The application process for seeking Solvency II equivalence can be lengthy.

For example, Bermuda, Switzerland and Japan have each had to go through a five-year process.

The process of seeking regulatory equivalence should therefore be initiated by the UK as soon as possible so that the relevant formalities for granting such equivalence are complete by the time the UK leaves the EU. As part of the negotiations the UK should offer reciprocity to the equivalence ruling by permitting EU reinsurers to write UK business, under home state prudential supervision rules. This would provide a significant benefit to EU companies and may help to speed up the equivalence ruling

WTO rules on insurance You often hear and see British politicians loudly declaiming that Britain does not really need a deal with the EU as it can trade with Europe and the rest of the world under the rules of the World Trade Organization (WTO) There are many reasons why they are very wrong - but then politicians who know nothing about special subjects tend to be the loudest in their apparent knowledge and most of the UK media is too tame to challenge their idiotic utterances.

WTO rules apply to insurance companies and brokers. The real scope of trade liberalisation in relation to services is limited and, once the UK has left the European Union there would be scope for improving access for the insurance sector through an economic integration agreement with the EU consistent with Article V of the General Agreement on Trade in Services (GATS).

One requirement of such an agreement is that it has substantial sectoral coverage. This would prevent an agreement with the EU that is restricted to insurance.

SOLVENCY 2 IN UK The Financial Conduct Authority and the Prudential Regulation Authority from 1 January 2016 transposed the Solvency II Directive into the UK. Solvency II applies to almost all insurers and reinsurance undertakings licensed in the EU. Only the smallest undertakings (typically, undertakings that are not part of a group and write less than EUR 5 million in premiums per year) are exempt from the new rules, although they may choose to apply them if they wish. Small insurance undertakings play an important role in the economic environment and should not be subjected to unnecessary regulation.

The UK version is a gold plated one that is much stronger than other countries require and while the PRA is open to minor changes and some flexibility for smaller firms-any hope of a burning of the regulations post Brexit is nil.

QBE QBE does not expect the UK government to be able to retain existing EU access arrangements for UK based insurers.

At the AGM QBE chairman Marty Becker explained; " While the impact of Brexit on the economy of the United Kingdom will take some time to become clear, with Article 50 now having been triggered the two year period for the UK to formalise its exit is now underway. We need to prepare our business for this reality, and we are doing so on the assumption the existing access arrangements enjoyed by UK domiciled insurers to the other 27 European Union countries will not be preserved. This impacts QBE Insurance Europe Limited and QBE Re in addition to our Lloyd’s business, which will be subject to a separate Brexit response plan being put in place by Lloyd’s."

Becker continued; " We are well advanced with our plans and negotiations for the establishment of a new location for our EU business, and expect to have a solution in place for 2018 renewals."

Australian insurer QBE has 1950 employees in Europe of which 1350 are in London.

In Europe QBE have offices in many cities including- Brussels, Copenhagen, Madrid, Milan, Munich, Paris, Stockholm and Strasbourg.

CEO John Neal says: “The UK’s decision to exit the European Union adds a little bit of complexity to our operations. It does not involve the meaningful movement of staff. Policy holders won’t see any difference in the way we deal with them.”

Prudential Regulation Authority The Prudential Regulation Authority (PRA) has written to all insurers with cross-border activities between the UK and the EU asking them to prepare for all scenarios in the Brexit negotiations, including a no deal outcome.

There is a 14th July 2017 deadline for firms to provide confirmation they have a worse-case scenario plan for trading with the European Union post Brexit so this leaves insurers with no choice but to address the issue immediately.

PRA had found the response from the financial services sector to the potential removal of current passporting rights was uneven with plans not sufficiently tested against the most adverse potential outcomes.

The regulator is now demanding that firms confirm they have plans in place and underway to deal with all potential outcomes.

PRA to all CEOs/ branch managers on contingency planning for the UK’s withdrawal from the European Union"This letter is relevant to insurers undertaking cross-border activities between the UK and the rest of the European Union (EU) and EFTA. This includes branches of insurers from other EU states operating in London.

The PRA expects all firms with cross-border activities to undertake appropriate contingency planning for the UK’s withdrawal from the EU. The UK Government has made clear that it is aiming for a comprehensive new trade relationship with the EU, coupled with an implementation period.

But given that a wide range of outcomes is possible at this early stage, the PRA expects firms to plan for a variety of potential scenarios.

All businesses must make and stand ready to execute in good time should the need arise, contingency plans for the full range of possible scenarios such that the safety and soundness of their UK operation is assured and the risk of any adverse financial stability impacts on the UK economy is mitigated.

Many firms are well advanced in their planning and have engaged closely with the PRA as part of that process. But the level of planning is uneven across firms and plans may not be being sufficiently tested against the most adverse potential outcomes such as if there is no withdrawal or trade agreement in place when the UK exits from the EU, and the UK and EU do not reach agreement on issues such as implementation periods, mutual recognition of standards, and co-operation in financial regulation or supervision.

Depending on the outcome negotiated by the UK government, the new legal framework may result in a statutory and regulatory regime with a large number of firms currently either physically based in the UK or providing services within the single market via passporting arrangements coming

directly under PRA authorisation and supervision. In that case, the PRA would need to form its own judgements, rather than relying exclusively on those of others.

Where firms currently rely on passporting arrangements to undertake business in the UK, or firms’ UK businesses include a material non-UK European element, then the PRA will expect them to have full contingency plans that cover a range of potential scenarios, including the most adverse potential outcomes outlined above.

Firms currently relying on passporting arrangements to undertake business in the UK should take into account the need to apply for authorisation from the PRA, which may be required in order to continue operating either as an incoming branch or as a subsidiary after the UK’s withdrawal from the EU. Firms should develop contingency plans for authorisation, including possible structural changes such as setting up a subsidiary.

The PRA requires written confirmation from every insurer or local branch that senior management has considered its contingency plans around UK withdrawal; a short summary of those plans; and assurance that those plans address appropriately a wide range of scenarios, including the no deal option.

Where authorisation or other regulatory engagement such as to support a business restructuring or court-led transfer of business then insurers must inform the PRA of those plans.

For many firms operating in the UK, the European element to their business may be small. For such firms, a de minimis response will likely suffice.

The PRA will use the responses that firms provide as an input to the Bank of England’s own contingency planning, and will share relevant information with the Financial Conduct Authority.

The PRA is open to reform and prepared to work with the industry to try and amend how Solvency II works post Brexit, in particular the internal model amendment process; recalculation of the transitional measure on technical provisions); external audit of the Solvency Financial Condition Report; notification of longevity risk transfers and the use of legal entity identifiers."

Italy Milan has joined the race to become the EU’s new finance capital.

Chairman of the Select Milano committee Bepi Pezzulli warns that Italians’ tendency towards self-denigration would have to be put to one side if aspirations of turning Milan into the financial centre of the Eurozone are to be realised.

In terms of infrastructure, Milan is a world leader and can offer a solution to the Brexit issue because it is already a junior partner of London.

Milan can compete and it is the only Italian city that can do so. National and local government have to work together as much as possible to attract the opportunities.

Milan has the infrastructure and airports that work. But it is not happening because Italy does not convey one image of a unified country. The image seen abroad is one of a fragmented country.

Milan hosts more than 40 international banks that do their business here.

Milan’s main selling points include the fact that Italy, the eighth largest economy in the world and third in Europe, has a good level of private wealth, particularly in property investment.

According to the World Bank Group’s Doing Business in Italy report, the country is first globally in terms of facilitating foreign trade across borders, in terms of time taken and costs needed to export. It is surprising given the obvious shortcomings Italy still has in infrastructure and bureaucracy.

Under the current regulatory framework foreign companies interested in doing business in Italy benefit from renewed efficiency and fluidity of the economic and legal system. This is down in part to increased efforts against corruption and money laundering.

As for taxation, different measures have been implemented in order to boost investment in Italy. Corporate tax has been reduced from 27.5% to 24% and other incentives have been launched in order to attract foreign companies, including a flat tax on income and capital gains on investments earned abroad.

In terms of human capital, a jobs act has been introduced that simplifies the hiring and firing of staff. Other relevant laws that are aimed at combatting the country’s brain drain include a five-year tax exemption for people choosing to come back to Italy.

As for infrastructure, ample commercial and residential space, four metro lines, the space afforded by the Expo facility, eight universities and three international airports all make a strong case for a post-Brexit shift to Lombardy.

Milan has developed the idea of launching an economic diplomacy initiative to define a new economic paradigm and a new set of business relations between Italy and the United Kingdom, involving Milan and the City of London, to develop a Eurozone financial district in Milan and to support the global role of Square Mile in the world.

Select Milan is an NGO that aims at building a permanent commercial bridge between London and Milan and establishing Milan for financial activities leaving the City of London following Brexit for regulatory reasons.

Select Milano intends to promote the establishment of "Milano.Distretto: Affari" and initiate a dialogue with central government and local governments to study tax incentives and measures to overcome country risk.