BaFin, the German financial regulator, has written to UK-based insurers to demand details of how they plan to deal with a hard Brexit.
The letter, seen by the Financial Times, asks for information about "what emergency plans you have developed to take into account all conceivable exit scenarios", although it places particular emphasis on a hard Brexit.
It comes amid concerns that insurers will not be able to fulfil their promises to customers after the UK leaves the EU.
A hard Brexit, with no exit agreement between the UK and the EU, could leave the industry in a legal quandary. Many London-based insurers use the EU’s passporting rights to sell policies — some of which last for decades — in other parts of the trading bloc such as Germany. They range from personal pensions to the kind of complex commercial policies sold in and around Lloyd’s of London.
If the passporting rights disappear, the insurers may not be legally allowed to pay out on those policies. Insurance companies say they face a choice of breaking the contract or breaking the law.
BaFin’s letter, which was sent to UK-based insurers that do business in Germany, suggests that the regulator is also concerned. It says that if the insurers lose passporting rights they will “no longer have the right to conduct insurance business in Germany”. It makes clear this includes “the settlement of claims and all other obligations deriving from a policy.”
The letter was sent over the summer, and asked for responses by this month. BaFin declined to comment.
In April, UK regulators contacted insurers asking for similar details about their post-Brexit plans, although companies say BaFin is the first overseas regulator to ask for details.
The fate of long-term contracts has been taken up by UK lawmakers. Last month, Nicky Morgan, chair of the House of Commons Treasury select committee, wrote to the chancellor Philip Hammond to raise concerns about the issue and urge him to discuss the matter with his EU counterparts.
Last week the same committee said that “the insurance industry should be regarded as a priority sector during the Article 50 negotiations”.
It added: “At the very least, if the government wants to achieve its objective of a ‘smooth and orderly exit from the EU’ then it needs to address the urgent issue of pre-Brexit cross-border contracts.”
Some London-based insurers have decided not to wait for details of any Brexit agreement before taking action. Many have already started to set up new subsidiaries in other parts of the EU, so they can continue selling policies when passporting disappears. Luxembourg, Brussels and Dublin have been the most popular destinations.
Others have gone further by embarking on so-called Part VII transfers, in which existing books of business are moved into the new subsidiaries. The transfers solve the problem of long-term contracts, but they are expensive and time-consuming. Some insurers would rather not launch a transfer unless they deem it to be really necessary. - Copyright The Financial Times Limited 2017
