29th July 2016
BIBA has sent a letter to senior Government figures setting out what, in their members’ opinions, are the most important considerations as the country begins it move towards exiting the EU.
Letter to Government
Dear Government member
BIBA member Brexit issues for Government consideration
Many of our member firms enjoy the benefits of tariff-free cross-border trade within the European Union (EU) and European Economic Area (EEA).
Partly as a result of this freedom, the UK is the third largest insurance market in the world and enjoys a balance of trade surplus in insurance-based products.
Much of this will be at risk if the UK were to lose the ability to trade freely with the EU. The issues we raise in this letter have been shared and agreed with both the London Market Group (LMG) and the London and International Insurance Brokers’ Association (LIIBA). We also share the concerns raised by the CBI and their 5 main principles.
Our sector specific issues are:
1. The Single Market and Passporting
It is our view that the best interests of our members are served by remaining within the single market as opposed to simply being able to access it.
BIBA members trading internationally use the passporting rights available to them under the Insurance Mediation Directive (and the soon to be effective Insurance Distribution Directive, which the UK will have to transpose into local laws by 23 February 2018, before expiry of any two year window from triggering Article 50).
This passporting right is particularly significant for business that is brought into the Lloyd’s and London market and for firms that have set up branches in EU states where they operate under the ‘freedom of establishment’ principle. In addition, some firms have their international headquarters based here as the UK acts as their gateway to Europe.
The ability to passport both into (to obtain customers) and out of the EU (to use EU insurers to increase competition and choice for customers) is critical to maintaining the level of trade that the UK currently benefits from.
Both the IMD and the newly created IDD do not clarify where an ‘activity’ takes place. It is therefore left to each individual state to determine where it believes each individual activity occurs. This will create an administrative nightmare if the passporting regime islost.
Please see this link to the ‘Luxembourg Protocol’ which was adopted by EIOPAs predecessor CEIOPS as a workable solution under the format of a protocol. https://eiopa.europa.eu/publications/protocols However, a “protocol” is not legally binding and does not create legal certainty. It would be important to have legally binding guidance on where the activity occurs.
Passporting also permits UK insurance brokers to support wider UK Government activity. By way of example; UK insurance brokers use the passporting facility to be able to handle the insurance needs of HM Forces personnel stationed in EU territories such as Germany, Italy and Belgium.
2. Equivalence regime
Some of our members base their international headquarters here because the UK acts as a gateway to Europe. To preserve our leading position as the European centre of insurance broking an equivalence operating model is important.
If it is not possible to be in the single market and the UK obtains third country equivalence status it is important to point out that we will not be offered any assistance by the Markets in Financial Instruments Directive (MIFID2), Solvency II or the credit or mortgage regimes that allow for equivalence in respect of ‘professional clients’. We would need direct support from Government in arranging new bi-lateral trade agreements.
To continue the free flow of business between the EU and the UK, it is important that our regulatory regimes remain comparable. This must be agreed regardless of Brexit, particularly in regard to Solvency II and IDD. (If Solvency II has an equivalence status we may still be unable to transact business if our IDD does not get a similar level of equivalence.)
The UK’s Financial Conduct Authority (FCA) has played an important role in the development of the financial services regulations that are applied across Europe (working within the European Supervisory Authorities, particularly the European Insurance and Occupational Pensions Authority and the European Securities and Markets Authority) and so equivalence should be a relatively easy position to argue.
3. The imperative of UK regulatory reform
BIBA welcomed the Government’s support in providing proportionate, robust regulation and governance, helping the insurance market to attract and secure top-rated capital.
However, in a post-Brexit economy, regulation will be an even bigger factor for foreign investors in deciding where to place capital investment and it is vital that our regulatory regime helps the UK actively compete.
Many regulators around the world have an objective to both regulate and promote the industry they regulate, and they do it very well. Singapore, Bermuda, Qatar and Dubai are examples of where regulators have this mandate and actively support the promotion of their local insurance markets.
The FCA and PRA do not have such objectives. Further, they do not even have to consider the impact of their actions on the competitiveness of the financial services sector.
This means that in the UK there is no mechanism to ensure that the cumulative impact of regulation is not damaging the ability of the industry to fulfil its role in servicing the economy, or to help London maintain its position as a global centre of insurance excellence against overseas competitors.
It is imperative that the Government continues with plans to list the FCA as one of those bodies subject to the Business Impact Target under the Enterprise Act. In addition we would ask that the FCA is given a balancing statutory objective to consider the international competitiveness of the UK financial markets and create a dedicated inward investment unit in the FCA to support and encourage new entrants to the UK.
4. Captive insurance arrangements
The impact on captive insurance companies writing for European operations from the UK, or vice-versa for a UK operation from a European base needs to be considered. Some brokers have created specific captive insurance arrangements for customers in order to place risks they are unable to place competitively in the UK. These arrangements will be put at risk where access to the EU is restricted and we may also see job losses for staff in the business units that focus on helping customers with these arrangements.
5. Maintaining employment opportunities
Insurance brokers who place business across Europe have raised concerns about the ability of UK citizens to continue to work freely within the firms’ European offices, as well as retaining staff they currently employ who originate from the EU. These employees are highly skilled, integrated into their local communities and difficult to replace.
6. Motor Insurance cover
EU membership has allowed UK citizens to enjoy the same minimum level of insurance protection when driving anywhere within the EU. This is because UK motor insurance policies provide cover to meet at least these minimum requirements throughout the EU as they do in the UK (in line with the Motor Insurance Directives).
For businesses operating in Northern Ireland, with the UK’s only land border with an EU state, there is now an uncertainty as to how the territorial limits within a motor insurance policy may need to change and how this will impact citizens crossing the border in either direction to go to work.
In a post-Brexit world, UK consumers, insurers and insurance brokers will need guidance from HM Government on whether UK citizens will need to arrange additional cover to their UK insurance, to permit them to drive in Europe. (Previously, UK citizens would have to apply to their insurance company for ‘green cards’ to drive in Europe and for Spain; obtain a bail bond.)
Further, BIBA is keen to see that the insurance trade between the UK and Gibraltar is not impeded in a post-Brexit world. Our understanding is that motor insurance business emanating from Gibraltar makes up 20% of the UK motor insurance market and importantly for Gibraltar itself, we are led to believe that it places 80% of its motor insurance business in the UK. Any difficulties in continuing that trade will obviously have a significantly detrimental impact on both parties. We understood there may be special arrangements in British Law that could allow passporting to and from Gibraltar and we await further clarity from HM Treasury.
Additionally, BIBA worked closely with the team supporting Lord Hill when in office as European Commissioner, to help address the unintended consequences from a ruling by the Court of Justice of the European Union (CJEU) in Damijan Vnuk v Zavarovalnica Trigalev (C-162/13) affecting an interpretation of the requirements of the Motor Insurance Directive. There is some concern that the ‘roadmap’ released recently by Lord Hill’s former department (see http://ec.europa.eu/smart-regulation/roadmaps/docs/2016_fisma_030_motor_insurance_en.pdf) may not be taken forward during the Slovakian presidency of the European Council.
Our members seek legal clarity on whether any amendments deemed necessary to the UK Road Traffic Act to align with the CJEU findings, will fall away once the UK is outside the EU and whether the UK courts will no longer need to interpret UK law in this area in line with EU law (even though the EU law came in whilst the UK remained a member). BIBA appreciates that this will be affected by any agreement with the EU on access to, or equivalence with, the Single Market.
7. Travel insurance
For travel insurance providers, the uncertainty regarding the continuation of the European Health Insurance Card (EHIC) card will need to be addressed. Losing the benefit of the EHIC for UK citizens will result in higher premiums for travel insurance.
8. Acquisition activity
HM Government must ensure that barriers are not raised against UK brokers looking to acquire EU domiciled businesses. This is an important area for our international brokers who seek to grow and expand their business.
9. Under-insurance risk for customers
During this time, we are recommending that brokers discuss with their clients any Brexit issues and the implications for their insurance risks; including the impact of changes in the value of Sterling on the value of materials or property or the costs of importing necessary materials to reinstate a claim. These are considerations that might impact the ability of small businesses to continue trading – clients with Euro or Dollar denominated assets may risk being underinsured for general sums insured e.g. for manufacturing businesses reliant upon importing raw materials from Europe – which in turn will have a knock on effect on the calculation of business interruption sums insured.
We understand that, even if the UK operates outside the EEA or EFTA, Brexit may not have an impact on direct taxes, we would ask the Government to consider exemptions and relief that would benefit UK business.
11. Opportunities with trade credit insurance
Our members have also expressed interest in the role trade credit insurance could play in managing some of the potentially increasing credit risk if some organisations start to struggle with the changes wrought by Brexit. We would be happy to explore such arrangements with HM Treasury.
In summary, this letter reflects the views and issues raised by our members and other stakeholders. The three most important matters we would like you to consider are:
1. Remain in the single market (with passporting capacity) or have access to it with regulatory equivalence
2. The UK Regulator to be given a statutory objective in supporting international competitiveness
3. To achieve a positive solution for UK staff working in Europe and EU nationals working at our member firms in the UK