On Friday 31 January 2020, the United Kingdom formally left the European Union. A transition phase then started and will last until 31 December 2020. During this transition, all EU legislation will continue to apply for UK and EU businesses and citizens. Negotiations for a bilateral EU/UK trade agreement will have to be completed by the end of this period, unless a further extension is agreed.
Despite the possibility of a two-year extension (up to December 2022), a cliff-edge Brexit in January 2021 is still possible if no trade agreement is reached at the end of the transition phase.
For the UK financial services sector, including insurance, the negotiations are likely to have great consequences. The European Insurance Authority EIOPA, European Banking Authority and European Securities and Markets Authority are currently assessing various options for the negotiations, including possible equivalence decisions for the UK regulatory/supervisory regimes. This work, which will continue until 30 June, will form the basis for a formal advice to the European Commission.
For Solvency II, equivalence is possible only for certain areas, such as the solvency calculation for EU insurers doing business in third-countries, group supervision for third-country insurers doing business in the EU and third-country reinsurance contracts in the EU. It will never provide the same level of integration offered by the passporting rights to an EU insurance company. Note: This has no link with the ongoing review of Solvency II, which will be concluded by the end of the year.
During the transition phase, the UK insurance supervisor, the Prudential Regulatory Authority, will continue to sit on the EIOPA board of supervisors, although its participation will be restricted on a case by case basis when there is an interest for both the UK and the EU. Under the future relationship, the UK will be treated as a third country from an insurance supervision perspective in all cases. Practically, this will mean no membership of the EIOPA supervisory board and therefore no voting rights.
Uncertainty will remain until there is a final agreement: if the UK insurance supervisory regime is recognised as equivalent to Solvency II or if there is no agreement and extension before the end of the year. Experienced European risk managers say that preparations for “Brexit proofing” under any circumstances were completed a long time ago. No further action was taken with the UK leaving the EU on 31 January, and any future insurance licensing issues will be addressed as necessary, according to the risk managers.
This article is part of the FERMA/AIRMIC joint Brexit Newsletter which is designed to give risk professionals unique insight into Brexit related risks and mitigation strategies.
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