After the trade pact: how Brexit affects the insurance sector
The United Kingdom left the EU on 31 January 2020. The Withdrawal Agreement set out a transition period during which legal and regulatory continuity was ensured. Since 1 January 2021, this period is now over. We outline the consequences for the trade in goods and insurance management.
At a glance
- The EU reached an agreement with the London government before Christmas on a trade deal that will regulate cross-border traffic from 1 January 2021.
- Following the completion of Brexit, German and British insurers will no longer be able to underwrite risks in the UK/EU. Funk has therefore registered in the UK and has successfully completed the TPR process in order to be able to manage contracts for an unspecified length of time following the end of the transition period.
- In future, there will be two models in terms of insuring risks in the UK. Funk will be happy to advise clients on which option is most suitable on a case-by-case basis.
Which regulations have now been passed?
In essence, a free trade agreement between the EU and the UK has been decided that provides for neither tariffs nor quotas (except for clothing, agricultural products and vehicles) and thus averts significant barriers to trade. Nevertheless, a customs declaration is now essential for the movement of goods between the EU and the UK and entails an export or import declaration and, for certain goods, also proof of additional licences, export permits or certificates. The regulations on the correct accounting of VAT also make trade in goods more complex. Overall, additional work and higher costs are to be expected in the movement of goods.
The UK and Germany: a close partnership
Germany is a major trading partner of the United Kingdom and is therefore particularly affected by the current Brexit situation. Germany is the second-largest importer of British products (after the USA), with a share of approx. 10 per cent. The United Kingdom also plays a key role in terms of exports: following the Netherlands, the UK is the second-largest buyer of German exports in the EU region (with a share of approx. 6 per cent). 41 of the 50 economic regions in Europe most impacted by Brexit are located in Germany. With Hamburg, Bremen, Cologne, Düsseldorf, Munich and Stuttgart, the effects will be particularly keenly felt by traditional German trading centres and cities where the automotive and aviation sectors account for a large share of the value chain. Furthermore, there are more than 2,500 branches of German companies in the UK, employing over 400,000 people.
Which industries are particularly affected?
Automotive parts, chemicals and pharmaceuticals all represent major import goods in the UK. EU companies affected have already responded by increasing warehouse capacities in the UK in order to offset delivery delays due to the need for customs clearance in the first few months of 2021.
In terms of exports, the focus is on fresh, perishable foods, such as meat and dairy products, that the UK exports to the EU. Logistically speaking, it is hard to build up stocks of these products. A significant stumbling block in the Brexit negotiations within this segment are the fishing rights of EU fishing boats in UK waters, with new access rules needed to be drawn up. In order to avoid transport and logistics chaos, particularly in terms of exporting goods from the UK, it is also conceivable that – even in the event of a ‘no deal’ – pragmatic processes will be put into place in the first half of 2021 until a lifting of customs checks.
Implications of Brexit for the financial services and insurance sectors
Within the EU, there is not only freedom of goods, but also freedom of services (FoS). The trade agreement does not include the financial services and insurance sectors. This will result in a loss of “passporting” rights and the end of FoS regulations for British and EU insurers, with these changes also affecting German insurance policies following the completion of Brexit. Using Europe-wide policies, German companies found it relatively easy to cover risks in the UK via their German insurance contracts. One benefit of this consistent, Europe-wide cover was that it eliminated the need for local policies/contracts.
Following the completion of the Brexit, German and British insurers will no longer be able to underwrite risks in the UK/EU. To enable them to continue operating within the European Union, British insurers have, over the past two years, been setting up subsidiaries within the EU, with the contracts and business activities of these subsidiaries still regulated by the European Banking Authority (EBA) and/or the European Insurance and Occupational Pensions Authority (EIOPA). For instance, the British insurance market Lloyd’s of London is transferring all insurance contracts with policyholders from EU countries to a subsidiary by the name of Lloyd’s Brussels. At the same time, German insurance companies have been establishing operations/strengthening their presence in the United Kingdom. As such, established British insurers can still be used to cover risks within the EU. Brexit is not expected to result in a shortage of insurance capacity.
Valid German insurance contracts for the coverage of British risks with terms beyond 1 January 2021 will initially not be affected by Brexit (pursuant to Sect. 66a of the Act on the Supervision of Insurance Undertakings [VAG]). Following a disorderly Brexit, the German Federal Financial Supervisory Authority (BaFin) is – as the supervisory body for German insurers – authorised to set a period of up to 21 months for the processing of the insurance contracts concluded prior to Brexit in favour of the policyholders and insurance beneficiaries. In order to ensure that they can continue operating in the UK beyond 1 January 2021, German insurers should register in the UK via the Temporary Permissions Regime (TPR). In this respect, insurance brokers are treated in the same way as insurers, meaning that they also require a licence to operate in the UK via the TPR system if they wish to continue managing contracts in the country beyond 2020, especially in the event of a claim.
As Dr Alexander Skorna says, ‘Funk has successfully completed the TPR process. As such, we now have the status of a registered insurance broker in the United Kingdom, enabling us to manage contracts for an as yet unspecified period following the end of passporting.’
Adapting insurance coverage
On account of the leeway offered by the transitional regulations, there is at first little pressure for policyholders with risks in the UK to adapt their insurance coverage. Fundamentally, there are two models in terms of insuring risks in the UK:
- Model 1: Transferring the risks in the UK to local contracts. In respect of existing coverage, this can still be done after Brexit within the aforementioned interim period regulated by BaFin.
- Model 2: Covering risks in the United Kingdom by means of a financial interest clause (FinC). This approach has already been implemented in some relevant agreements by means of a ‘Brexit clause’ and extends insurance coverage to include financial losses due to value impairments of financial interests held by the German parent company in risks/entities in the UK. For such a clause to apply, the losses concerned have to be covered under the contract.
For new contracts for the coverage of British risks from 2021 onwards, Funk generally recommends insurance through local policies in the UK. A potential conversion of ongoing FoS contracts into FinC agreements makes companies liable for German insurance tax, which has to be factored into the overall assessment and calculation. For project coverage with clearly defined multi-year terms, a FinC solution may nonetheless offer advantages; a local policy is not always required. Local claims (e.g. liability claims) are, however, covered more effectively via suitable local contracts in light of the liability regime in force in the United Kingdom.
Political risk expert Dr Skorna: ‘Ultimately, it is important to review, in connection with Brexit, the limits for CBI risks in property insurance policies that cover the impacts of property damage sustained by suppliers and customers. With the now legal completion of Brexit, these limits will generally be much lower for unnamed suppliers and customers.’
If you have any questions about insurance-related topics associated with Brexit, please contact your Funk contact or one of our specialists. We will show you suitable solutions in a transparent and comprehensible manner.