Brexit for insuranceMapping the road to Brexit

3

With the clock ticking on the UK’s exit from the EU, insurance and reinsurance companies and intermediaries on both sides of the channel are currently weighing up their options to manage the impact of Brexit and safeguard their customers and businesses.

A step-by-step guide to designing and implementing a strategy to meet the challenges of a post-Brexit world

Brexit for Insurance: mapping the road to Brexit 1

Major issues to consider include:

► Expected loss of passporting rights

► What the UK will do about Solvency II after Brexit and the EU attitude to equivalence

► Uncertainty about the extent to which companies will be allowed to outsource or delegate activities outside the EEA or UK

► Where employees on either side of the UK and EU divide will be allowed to work and what they will be permitted to do

► Lead times to deliver solutions, and how to navigate political and regulatory uncertainties

Phase 1 DiscoveryThe first step consists of understanding the impact of Brexit on your business and developing a business strategy for EU and UK activities. This will vary from company to company. Factors include the different existing entities impacted, type of business and scale of book. This analysis will give you a firm grasp of the challenges you’re trying to address in your European portfolio. Questions to ask include:

► How much business do you currently write under ‘passport’1 within the EU from UK entities and in the UK from EU entities?

► How much is written into (or out of) the UK under Freedom of Services?

► Is your passported business in Europe/UK profitable?

► What is your ambition in passported jurisdictions and are they growth areas?

► What type of business is at risk: insurance or reinsurance?

► What are your competitors doing?

► Is the passported business part of a wider programme such as a multinational contract?

The challenge is that responding to Brexit involves a great deal of uncertainty; no one knows what kind of deal the UK will get. However, businesses can’t afford to wait and see what happens. If they do, and the result of the negotiations isn’t what they have anticipated, it will be too late to put a solution in place. As a result, most organisations are taking a ‘hard’ or ‘clean’ Brexit scenario as their starting point when thinking about the business impact. Indeed, it is this scenario that the Prudential Regulation Authority (PRA) has asked firms to plan for, as part of their submission of contingency plans for regulatory review.

1 Passporting refers to conducting business via freedom of establishment or freedom of services.

Brexit for Insurance: mapping the road to Brexit2

Phase 2DesignFollowing an overview of the implications of Brexit on your business, the second phase establishes the options available and how best to proceed. There are four main options to consider if you want to continue carrying out currently passported business in the EU from UK entities and in the UK from EU entities post Brexit.

1. Start a new businessThe scale of business at risk, its potential and its profitability. will determine whether setting up a subsidiary company is worthwhile. This is an option that can be applied both ways across the Brexit divide. It involves establishing a new authorised EU-domicile or UK-domicile company and potentially migrating existing customers’ policies to the new company by way of a portfolio transfer if formally required by the regulator. The new UK company can continue servicing the UK market, whilst the company within the EU can continue to use passporting rights across the EU.

Every company will have different reasons for choosing a particular jurisdiction to establish a new company. Companies will need to consider their existing business and operational footprint, as well as the attractiveness of the relevant domestic market, the available people resources, the tax and capital impacts, and the regulatory requirements, in order to choose the most appropriate option.

2. Move a companyMoving a company in its entirety into or out of the UK is rarely an option, as UK domestic company law does not provide for corporate migration. A Societas Europaea (SE) company can move its registration between EU countries, so an SE registered in the UK could transfer its UK business to a UK company, and then move before Brexit with the remaining

business to another jurisdiction in the EU, applying for insurance authorisation there. A move to the UK by an SE registered in another country is also possible, though the status of UK-registered SEs post Brexit is not certain. Other types of company, incorporated under local company law, cannot simply move to or from the UK, but they can migrate before Brexit by cross-border merger and seek authorisation in the new home state. Again, they would need to deal with their exposed business. A formal portfolio transfer process may also be necessary for the whole business, depending on the nature of the merger and the regulators’ attitude.

3. Fronting companyThis option entails asking an insurance company based in the EU to write or renew all your EU business; they then reinsure that risk back to your company in the UK. The same process works in reverse for EU organisations. ‘Fronting’ arrangements may not be favoured by regulators.

4. Develop a third-country branchThis involves setting up a branch of the existing company that is authorised to operate in a single country. This option could make sense if the company writes a lot of business in a particular country. However, the branch will often be heavily regulated and (unlike an EU subsidiary) won’t have passport rights across other parts of the EU, so it will only be able to issue policies in that country.

For an EU-based insurance company willing to develop a third-country branch in the UK, the PRA has stated that the authorisation cannot be formalised until Brexit. There may be a change in circumstances as the Brexit negotiations proceed.

Brexit for Insurance: mapping the road to Brexit 3

Phase 3 ImplementationIn this phase, the selected option is realised. The company is set up, the regulatory authorisation is obtained and the existing business or renewal rights are transferred to the new entity so that it is able to continue business beyond March 2019.

A detailed plan for the legal, regulatory, tax and operational processes will need to be prepared in order to be ready for March 2019. What’s more, with the start of the year being a peak period for insurance renewal, and negotiation of renewals often a few months in advance, ideally this should be ready for Brexit before end of 2018. That’s a tight deadline when you consider that many companies will be on this critical path at the same time; the regulators, the courts and the tax authorities are all going to be busy between now and then.

To meet this deadline, the key internal factor is to ensure that there is a clear view of tasks and efforts required, as well as sufficient resources to submit the various applications on time

Firms will also need to ensure that they have the right people and skills in the right locations when Brexit arrives. Regulators will expect newly created EU companies to have ‘substance’ — in other words, regulatory pre-approval for key functions and enough people in the head-office location with the right skills to provide appropriate management and governance. The question for organisations starting or moving a business is whether people with the requisite skills and experience can be sourced locally, given the potential changes to UK citizens’ rights to work in the EU and vice versa. Other challenges for carriers include identifying options for business that they wish to run off, and the extent to which they will be able to make use, in their EU operations, of underwriting and claims centres of excellence in London, post Brexit.

Finally, throughout this phase, it’s important to consider how your Brexit strategy is communicated to regulators, intermediaries, rating agencies, clients and your own employees.

Phase 4 BufferThe last step in our recommended methodology is to ensure that companies build enough time into their strategy to accommodate delays along this critical path. Mitigation plans need to be in place if there’s a delay with the regulators or the tax authorities. This is quite possible, given the sheer number of applications the authorities will likely be dealing with.

4 Brexit for Insurance: mapping the road to Brexit

How EY can helpWe can offer flexible support to clients across the full spectrum of the four phases of Brexit planning, covering regulatory, legal and tax issues, capital, operations, financial reporting, processes, and people. Working collaboratively with our clients’ in-house teams, the different levels of our assistance range from a review and challenge of companies’ Brexit preparations to their involvement in full implementation of the plan. Moreover, we have an integrated model across Europe, which enables us to connect our clients to the appropriate professionals in the different jurisdictions.

Conclusion An opportunity as well as a threatDespite the disruption involved, Brexit offers opportunities as well as threats for insurance organisations. As a by-product of this process, some companies establishing entities in different jurisdictions are beginning to realise the power of their brand and their attractiveness in those countries. This can be a catalyst for re-examining their strategy in the EU and adjusting their ambitions accordingly.

So, ultimately, your Brexit road map should not lead to a dead end, but to a wide highway with exciting new destinations ahead.

Next stepsContact a member of the EY team to discuss how they can support you with your Brexit challenges.

5Brexit for Insurance: mapping the road to Brexit

Simon BurtwellUK Insurance Advisory LeaderTel: +44 20 7951 0532Email: sburtwell@uk.ey.com

David Bearman UK Insurance Tax LeaderTel: +44 20 7951 2249Email: dbearman@uk.ey.com

Benedict ReidUK Insurance Brexit LeaderTel: +44 20 7951 3445Email: breid@uk.ey.com

Simon WoodsGlobal Insurance Brexit LeaderTel: +41 58 286 3879Email: simon.woods@ch.ey.com

Contacts

EY | Assurance | Tax | Transactions | Advisory

About EYEY is a global leader in assurance, tax, transaction and advisory services. The insights and quality services we deliver help build trust and confidence in the capital markets and in economies the world over. We develop outstanding leaders who team to deliver on our promises to all of our stakeholders. In so doing, we play a critical role in building a better working world for our people, for our clients and for our communities.

EY refers to the global organization, and may refer to one or more, of the member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients. For more information about our organization, please visit ey.com.

EY is a leader in serving the financial services industryWe understand the importance of asking great questions. It’s how you innovate, transform and achieve a better working world. One that benefits our clients, our people and our communities. Finance fuels our lives. No other sector can touch so many people or shape so many futures. That’s why globally we employ 26,000 people who focus on financial services and nothing else. Our connected financial services teams are dedicated to providing assurance, tax, transaction and advisory services to the banking and capital markets, insurance, and wealth and asset management sectors. It’s our global connectivity and local knowledge that ensures we deliver the insights and quality services to help build trust and confidence in the capital markets and in economies the world over. By connecting people with the right mix of knowledge and insight, we are able to ask great questions. The better the question. The better the answer. The better the world works.

© 2017 EYGM Limited. All Rights Reserved.

EYG no. 00009-184GBL

EY-000046405.indd (UK) 11/17. Artwork by Creative Services Group London.

ED 0133

In line with EY’s commitment to minimise its impact on the environment, this document has been printed on paper with a high recycled content.

This material has been prepared for general informational purposes only and is not intended to be relied upon as accounting, tax or other professional advice. Please refer to your advisors for specific advice.

ey.com