On 13 July 2020, the European Commission published a notice to stakeholders on the effects of the end of the transition period after which the UK’s relationship with the EU will fundamentally change. The notice is aimed at EU (re)insurance companies and insurance distributors.
The Commission advises firms to assess the consequences of the end of the transitional period on 31 December 2020, if they have not already done so. After the transitional period comes to an end EU law ceases to apply in its entirety in the UK. The Commission notice states that firms must take appropriate steps to address the risk of losing market access in a timely manner. Amongst other measures steps might include the transfer of activities or contracts to the EU.
The notice summarises the consequences of the end of the transition period which are as follows:
- UK authorised (re)insurance firms will cease to be authorised under Solvency II and intermediaries will cease to be authorised under the Insurance Distribution Directive.
- Branches of UK firms located in the EU will become third-country branches. These branches must seek local authorisation if they wish to carry on activities in EU member states. Passporting rights are not granted with the local authorisation. In contrast, subsidiaries established in EU member states may benefit from passporting rights.
- UK reinsurers will be subject to the rules in each EU member state. These rules cannot, however, be more favourable that rules applied to EU reinsurers. The Commission is empowered to declare the UK’s regulatory framework equivalent, which could result in treating reinsurance contracts concluded with UK reinsurance undertakings in the same manner as reinsurance contracts concluded with undertakings authorised in accordance with Solvency II.
- The loss of EU authorisation may impact the ability of UK firms to perform contractual obligations entered into before the end of the transition period.
- Solvency II requires that policyholders are kept informed about the impact of the end of the transition period on their contracts and the provision of services.
- Undertakings operating in the EU as part of a group with a UK-head office may find that the end of the transition period will have an impact on their operations. It may be that the EU authorities will require that a holding company is established within the EU or require that a worldwide group solvency calculation is undertaken. Group level internal models undertaken by the PRA prior to the end of the transition period will cease to be applicable. Although an assessment of equivalence would alleviate these requirements, there can be no certainty that an assessment of equivalence will be reached and therefore firms should prepare for a no-equivalence scenario at the end of the year.
- Insurance intermediaries registered in the UK under the Insurance Distribution Directive will lose their rights under that Directive and may not be able to distribute policies within the EU.
What do firms need to do?
Most firms will have already undertaken (or completed) steps to ensure that they are able to continue servicing customers in the EU (or UK) as appropriate. The notice makes clear that firms should prepare for there being no deal in place by the end of the year and should communicate their plans to manage this scenario clearly with customers.