Background

In June 2016, the UK population voted to leave the European Union (“EU”), and this decision is now commonly referred to as “Brexit”. The official leave date is March 29th 2019.

Because of the huge complexities involved unwinding and possibly replacing over 40 years of laws, a transition period of 21 months has been agreed (though not yet ratified) between the EU and the UK to allow for an orderly exit. During this period effectively nothing will change until December 31st 2020 other than the UK will have no further influence on EU rules.

This transition agreement is however contingent upon a formal withdrawal agreement being finalised between the EU and the UK. It is possible but most people believe incredibly unlikely that a withdrawal agreement may not be finalised before March 29th 2019 in which case the transition agreement will not be honoured.

Currently emotions are running high on both sides which have led to a huge amount of largely unfounded media speculation as to the final outcome. This speculation has no basis of fact as no one at the time of writing can have any idea how the final political deal will turn out.

Implication

The majority of major insurers operating out of the London Market whether they are UK owned or subsidiaries of foreign multi-national insurers rely on what is known as ‘passporting’ rights which allows them to insure and service EU exposures. Once the UK leaves the EU, absent any interim solution, these passporting rights will cease and many insurers will no longer be licensed to insure EU exposures. Whilst there is absolutely no impact for many of our clients, those who have risks located in the EU may be affected by this.

Solution

Lloyd’s and the affected insurers are fully aware of this potential change and have been taking steps to ensure that they can continue to provide insurance coverage in the EU, irrespective of what happens. Indeed the regulators within the EU and the UK have instructed all insurers to make plans based on a worst possible scenario for them as insurers in efforts to protect the end policy holders. Although the insurers are acting independently, the general market approach has been to engage lawyers and accountants to assist in establishing EU entities that will comply with EU regulations and operate in a way that will enable them to continue to underwrite EU business from the UK, post Brexit.

As an example, Lloyd’s has established an insurance company in Brussels called Lloyd’s Europe SA. Lloyd’s Europe will delegate underwriting and claims authority to its UK branch which will enable them to operate as they do now. Lloyd’s Europe SA will be 100% reinsured by Lloyd’s in the UK, thus retaining the same credit rating. In summary, there will be absolutely no change in the way the process works at the moment apart from that the stamp on the insured’s policy will be Lloyd’s Europe SA rather than Lloyd’s UK.

The plan is that Lloyd’s Europe will come into effect on January 1st 2019 and all placements that have EU exposures will have Lloyd’s Europe named as the carrier for those exposures from that date. We are unsure exactly how this will work but will keep you advised as it becomes clearer.

AIG have taken a similar approach and are currently writing to all insureds irrespective of where they are based to inform them of how they intend to act. We have spoken to AIG and are confident of their approach.

As the insurers are all operating independently, we anticipate some policy holders may receive communication from them about Brexit over the coming months.

Our position

We at Paragon are fully engaged in Brexit and all that it entails. Given that there are still so many unknowns (including whether the UK will ever leave the EU!), we are refraining from making further comments except to say that the one overriding theme of all parties, including Regulators, is that Policy Holders will not be prejudiced. We will continue to do our utmost to keep policy holders and producing brokers informed and properly protected. In the meantime, we continue to monitor the situation and update you as developments occur. If you have any questions, please do not hesitate to contact: Nick Lewin or Glen Obermaier.