Articles - Brexit Unfolding

2018 will be a busy year full of challenges, decisions and actions in preparation for the UK’s departure from the European Union. Many insurers are greatly affected by Brexit but what does it practically mean for businesses and what are firms actually doing? What can be expected in the months ahead? Can you flex your plans to make the most of any transitionals? Do you need to push ahead or should you press pause?

 By Kareline Daguer, Director, PwC

 I will aim to take a look at some of the challenges ahead and what I believe are the key factors for a successful Brexit journey.

 With less than a year to go until 29 March 2019 and so much speculation about Brexit in the press, it’s difficult to extract the signal from the noise. Having said that, some tangible movement is being made, although we’re still far from certain about the outcome of negotiations.

 In mid-March the UK and EU announced they’d agreed a transitional (or implementation) phase to begin on 29 March 2019, running until December 2020 (21 months). This was later approved by the European Council. Under the transitional agreement, the UK will have full access to the EU as they do now, whilst continuing to abide by EU rules. The main difference during this period is that the UK will no longer have the power to shape European regulation.

 The announcement of an agreement on a transitional phase is very welcome but will not provide firms with certainty until later this year when it is ratified. The ratification is likely to happen in autumn 2018 at the earliest but might be as late as early 2019.

 Resolution of the Irish border issue is tangled with the transitional and, as a result, there remains some risk that the transitional might not come to pass after all. This uncertainty means that, at this stage, firms can’t bank on 21 extra months to implement Brexit with certainty. It also means that it’s more likely than not they will have extra time to work with. With all this in mind, firms should consider whether the timing of some of their plans could be revised.

 What could firms do about their Brexit plans in light of the information we have so far? Many firms have been working on contingency plans and implementation for some time now. Some of these plans are fiendishly complex and costly, involving workstreams on authorisations, Part VII portfolio transfers, operational changes due to implementation of new business models, and internal model and other regulatory approvals. First, for workstreams dependent on regulatory decisions (authorisations, Part VIIs and approvals), firms should prioritise keeping an open dialogue with the regulator and obtain a steer as to what is expected. Investing time and effort in maintaining a good regulatory relationship should be a top priority. Ideally, authorisation plans should continue but in the knowledge that the new entities might not become fully functional until it is really necessary, thus allowing firms to take advantage of any transitional.

 Secondly, operational changes that will be difficult to reverse should be considered separately. Practical steps such as moving people and committing to new locations (signing leases on office buildings, for example) could be slowed down to avoid going too far too early. As we near the autumn it will become clearer whether the transitional will hold. Also – and importantly - in the event of a successful final agreement between the UK and EU it might well be the case that even the current proposed Brexit business models will have to be revised to make the most of new access arrangements. The final agreement is likely to have an impact on how firms are able to operate cross border and firms should allow some wriggle room in their plans to accommodate for this eventuality.

 Finally, the issue of back books and contract certainty has been in the news for quite some time, and has focused the minds of many. The issue at hand is whether firms can continue honouring their cross border insurance contracts written before Brexit. EIOPA was clear that in most EU Member States insurers need a regulatory licence to pay claims and therefore even to run-off a portfolio they would need to be authorised. A transitional buys time to sort this issue but the issue itself does not go away. Part VII transfers are costly affairs and although the PRA and HMT can help EU insurers that have UK policyholders by allowing them to continue paying their claims without being UK authorized, the same message has not yet been heard from Europe. This is exacerbated by the fact that each Member State might take a different position and so far EIOPA is taking a hard stance on the issue. Here again, keeping lines open with the relevant EU regulators is key - more time to Part VII back books and to run them off is helpful. However, EU regulators under pressure from EIOPA might continue to press firms to sort their back books to ensure contract continuity after Brexit.

 In summary, the future after March 2019 is looking a little rosier but certainty still eludes us. Firms will have to strike a balance between making the most of the potential good news and having some degree of certainty in their plans’ effectiveness. This happy medium will sit in different places for different firms. Now is the time to pause to give this news the consideration it deserves and adjust plans accordingly.

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