Summary by: Joseph C. Monahan, Saul Ewing LLP

The education sessions at AIRROC’s New Jersey Commutation and Networking Event included a panel discussion regarding the implications for the insurance industry of the United Kingdom’s recent vote to withdraw from the European Union, otherwise known as “Brexit.”  Michelle George, Partner with Chadbourne & Parke (London) LLP moderated the panel, which was comprised of: James Ferris, Director with PwC; Carolyn Coda, Swiss Re’s Deputy Head of Government Affairs Americas; Pascal Salelles, AXA LM’s Global Head of Commutations; and Frank Schmid, Head of Property & Casualty Inforce Management, AIG. 

The panelists generally agreed that it is difficult to handicap what Brexit will mean for the insurance run-off industry at this point, as there still remains much uncertainty.  In fact, Mr. Schmid observed that there is still some chance the U.K. will not complete its withdraw from the E.U., as any final deal negotiated under Article 50 of the Treaty on European Union will have to be ratified by the British Parliament. Much will depend on whether the negotiations between the U.K. and the E.U. will result in a “soft Brexit” or “hard Brexit.”  A soft Brexit would see the U.K. participate as a member of the European Economic Area (“EEA”), similar to Iceland, Norway, and Lichtenstein, or at least participate in the European Free Trade Association (“EFTA”), which includes Switzerland along with the three EEA countries.  A hard Brexit is a situation where the U.K. does not participate in either of these organizations but instead relies in its trade relations with the E.U. on World Trade Organization rules, supplemented by bilateral trade agreements.  Given the immigration issues that seem to have motivated much of the Brexit vote, the panelists agreed that a hard Brexit is the most likely outcome.  In the meantime, the uncertainty as to what form Brexit will take has its own negative implications.     

A hard Brexit would jeopardize the ability of a U.K. company to do business throughout the E.U., using an element of E.U. membership known as “passporting,” which allows financial services to be sold in the E.U. without the need to seek further authorization from each E.U. country where it seeks to do business.  This could pose a hardship on U.K.- based insurers.  For instance, if the company had run-off operations in Europe, and the U.K.’s passporting rights were cancelled, the U.K.-based company would need to establish a European-based affiliate in order to facilitate access to the European market.  The panel pointed out that in 2014, across the E.U., only 13 percent of insurers’ cross-border market entries occurred via passporting, the balance having occurred via the establishment of subsidiaries.  For insurers that currently access the E.U. through the London market, much will depend on the ability of Lloyd’s to continue to provide such access, possibly by establishing a subsidiary in the E.U. 

An alternative to passporting, known as “equivalence,” is available, through which reinsurance services outside of the E.U, but in a regime deemed “equivalent” to the E.U.’s, can be sold. Equivalence is not available for insurance, so for those entities without a European presence, it would be necessary to establish and provide insurance via a European subsidiary, then reinsure to the equivalent regime.  This could at least mitigate the loss of passporting rights, but it is not yet clear what this would look like in practice.  It is likewise not yet apparent what impact Brexit will have on the U.S. market, although some panelists expressed skepticism that it would have a significant effect. 

The panelists agreed that the situation is a fluid one, with many questions left to be answered before any clear impacts on the ongoing and run-off markets can be fully understood.