The trade credit insurance market has readied itself for all possible forms of Brexit and is set to keep writing EU business next year, regardless of the outcome of the UK’s final negotiations, writes Rebecca Spong.
As the UK’s departure from the European Union fast approaches, trade credit insurers have been readying themselves to seamlessly continue to write risks from the European Economic Area (EEA), whatever the outcome of the Brexit negotiations.
Most insurers and brokers have already put together contingency plans for a ‘no-deal’ scenario, a situation whereby the UK leaves the EU without any trade agreement in place and the country’s financial services lose their passporting rights to the EU market.
These rights had enabled firms authorised to work in one particular EEA country to also carry out activities in other EEA nations without requiring authorisation from a local regulator.
With Brexit talks stalling after the EU rejected UK Prime Minister Theresa May’s ‘Chequers’ plan outlining plans for a new free trade area, the chance of a ‘no-deal’ is becoming increasingly likely as this publication goes to print, some five months before the official divorce. Insurers say they are ready for the likelihood of a ‘hard’ Brexit.
“It is difficult to anticipate the outcome of any ‘deal’ but what is clear is that the UK government is not seeking for passporting rights to continue after the UK has left the EU. As such, UK insurers and brokers currently relying on passporting rights to conduct trade credit insurance from London will have to make alternative arrangements,” says Sian Aspinall, managing director of insurance broker BPL Global.
“While we, like the wider financial services industry, will be hoping that the proposed transition period is agreed, ultimately we anticipate that any deal will only give us breathing space to the same end point as a ‘no deal’ scenario where the UK becomes a ‘third country’ from an insurance regulatory perspective and is treated no differently than any other non-EU jurisdiction,” she adds.
The Lloyd’s market plan
In preparation for a ‘no-deal’ Brexit, the Lloyd’s of London insurance market – under which various insurance syndicates exist – set up a new Brussels-based insurance company in March 2017, called Lloyd’s Insurance Company SA.
This new entity will underwrite all non-life and facultative reinsurance risks located in EEA countries from January 1, 2019 – earlier than the official Brexit date of March 29. It will be able to write risks from all 27 EU countries and three EEA areas.
The then-chief executive of Lloyd’s Inga Beale said at the time of the launch that it was “important” to ensure the market would be “able to provide the market and customers with an effective solution that means business can carry on without interruption when the UK leaves the EU”.
The subsidiary will have 19 branches throughout Europe, including the UK, and it will be regulated by the National Bank of Belgium.
The Lloyd’s Market Association (LMA) issued new policy documentation in September to support the underwriting of risks via Brussels.
Insurers active in the Lloyd’s market generally anticipate minimum disruption to business flow next year, despite the fact that new EEA risks will be written via the new Brussels entity. “It is just a matter of adapting to a new environment,” reports one London-based broker.
Trade credit insurers are working particularly closely with their bank clients based in the EEA to ensure they understand how the product will work next year.
“There is an explanatory and transparency process with the banks, so they can understand the process and justify it internally to their own credit departments and, also, if necessary, to their regulators,” says Peter Jenkins, co-head and class underwriter at Brit Insurance.
“We have got to work hard to support our existing client base – particularly EU-domiciled banks – to help them maintain credit lines under the new structure,” he says.
Lloyd’s has been holding workshops with syndicates and brokers to get the message out in a “relatively clear manner”, he adds.
Many rating agencies have already issued attractive ratings for the new Lloyd’s entity. AM Best assigned it a financial strength rating of A and a long-term issuer credit rating of A+ with a stable outlook; Standard & Poor’s has given it A+ and Fitch AA-.
“These ratings recognise the importance of Lloyd’s Brussels as an insurer for risks from the EEA, and it means that our partners and clients across the region will continue to benefit from Lloyd’s strong financial ratings and the security of our central fund,” said Vincent Vandendael, CEO of Lloyd’s Brussels in an official statement in August.
Other Brexit approaches
Other non-Lloyd’s insurers and brokers have also implemented contingency plans. Some trade credit underwriters already had existing European entities that they will use to conduct their EU business, while others are re-domiciling their existing UK company to an EU jurisdiction. Some, even, are establishing new subsidiaries within the EU, which will operate via a branch in the UK.
“In BPL Global’s case, we have a well-established French company of over 15 years which will retain its passporting rights to transact business across the EU post-Brexit and so whatever the final outcome of Brexit, we will be able to provide a seamless service to all our European clients wherever they are located,” Aspinall says.
Insurer Markel International is one of the those that opted to set up a new company in the EU, creating an entity in Germany which will conduct EEA business from January 1, 2019.
“We don’t think Brexit, in whatever form it eventually arrives, will have any impact on doing business with clients or risks in the EEA. Because the outcome of the negotiations was always unclear, we have prepared from the beginning for a hard Brexit. That meant setting up an insurance company in Germany, where we have had a branch office for six years,” says Ewa Rose, managing director of trade credit, political risk and surety at Markel International.
Rose says the new company Markel Insurance SE has been licensed by BaFin, the German regulator. It has an A rating from AM Best, and is backed by Markel Corporation, itself A rated, and shareholders’ funds of US$9.5bn.
While the UK’s insurance market has put in place most of the required infrastructure to maintain the continuity of business post-Brexit, a few practical challenges remain, including staff location.
In April 2018, Lloyd’s announced it had started to hire people for its Brussels operation across finance, operations, compliance, HR and underwriting.
Questions have been asked about how much industry talent will end up staying in London and what roles might be moved to the new European insurance entities.
“The main challenges facing both insurers and brokers are operational in that the bulk of our market’s underwriting and broking expertise for servicing European business will continue to reside in London after the UK has left the EU,” says Aspinall.
“Insurers and brokers which have established, or are establishing, European subsidiaries will be considering what activities can be undertaken in London via the UK branch and the position will likely vary between market participants depending on the domicile of their European entity and the regulations which apply in that jurisdiction,” she explains.
She adds that Lloyd’s and a number of other players anticipate that the bulk of insurance-related activity in respect of European business will continue in London post-Brexit.
Elizabeth Stephens, managing director of risk consultancy Trendline Analytics, agrees that London will likely retain a large proportion of insurance expertise, and argues that regardless of the Brexit fallout, the capital is well-positioned to find other growth opportunities. Stephens spent nine years as head of credit and political risk advisory at JLT Specialty before founding Trendline.
“The final regulatory framework between the markets will be a key determinant, as will the willingness of underwriters to innovate and take risk. The majority of personnel will remain in London and there is likely to be a disparity between where work is conducted and policies written,” Stephens says.
“The City of London and those who work there are incredibly resilient and have the capacity to recreate themselves, create new products and develop new markets if existing opportunities fall away. This is also true of Lloyd’s of London,” she adds.
Stephens suggests that the use of technology in the insurance world could be a bigger market challenge than Brexit in ensuring London maintains its prominence.
“Many underwriting models are still based on Excel and the role big data and business analytics can play in creating competitive advantage is only being slowly understood and adopted. The speed with which Lloyd’s integrates technology and seizes the opportunities it presents will be a key determinate of long-term competitiveness,” she says.
There are further lingering questions about existing insurance contracts with EEA clients and how they will work post-Brexit, particularly regarding the payment of claims.
“The sanctity of existing contracts which run past the date of Brexit is not in question; we have obtained our own legal advice confirming that such contracts will not become void, voidable or unenforceable as a result of Brexit,” says Aspinall. “Rather, the key issue is how insurers will be able to service such contracts and pay claims if they are no longer licensed in the EU. On this point, the regulatory position is complex and varies depending on which EU jurisdiction you are looking at, where some jurisdictions are more positive than others.”
A number of insurers have taken pre-emptive action by carrying out so-called Part VII transfers of existing EU business to a licensed EU carrier of equivalent financial strength and rating to ensure continuity of business, Aspinall adds.
“Insurance contacts underwritten by insurers which are re-domiciling their UK company to the EU are not affected,” she says.
Simon Woods, partner at EY, says that while current contracts are expected to remain valid post-Brexit, the more pertinent question is whether insurers are able to receive premiums or pay claims unless they have the relevant authorisations.
“A simple example of this if where a UK insurer writes business in Europe on a passported basis pre-Brexit, but after Brexit no longer has access to the EU as passporting rights are expected to be lost. Unless the insurer has established an authorised presence in Europe, and depending on the European country, it may be illegal to conduct insurance business, including receiving premium and paying claims, without authorisation.”
This issue is broadly called “contract continuity” and Woods explains that it is high up both the EU and UK agendas.
“There is a task force looking at this, but it is not clear whether there is sufficient time or attention in the context of the broader Brexit negotiations to resolve it pre-Brexit. This is more due to the multilateral decision-making process rather than any desire to see contracts being frustrated in this manner,” he says.
While uncertainties will remain about how smoothly the industry will transition to a post-Brexit world, the majorityof the insurance industry has made steps to ensure they are in the best position to ensure business continuity.
For now, as this publication goes to press, the market – much like the rest of the UK – will have to wait and see what final months of the UK’s negotiations with the EU will bring.