In the absence of a Brexit trade deal between the United Kingdom and the European Union, insurers in the UK have accelerated their plans to establish new EU subsidiaries and ensure business continuity after Brexit, according to a report published by A.M. Best.
The ability to continue to conduct cross-border business is a particular concern for Lloyd’s, London market carriers and other UK-based commercial insurers, said the Best’s Briefing, explaining that this is less of an issue for retail insurers because of their focus on UK domestic business.
The formation of EU subsidiaries will enable insurers in the UK to underwrite EU business after March 2019, or following an agreed transition period, said the briefing, titled “Insurers Step up Brexit Plans in Absence of Clarity.”
On the other hand, small insurers, which do not have the resources to form EU-based subsidiaries, are forming relationships with local carriers that can front business for them in the EU, the report added.
In the absence of a political solution for Brexit, UK companies that currently make use of EU passporting rights “will not be able to service claims on existing EU policies after Brexit,” the report said.
As a result of these uncertainties, a growing number of insurers “are exploring potentially expensive Part VII transfers of existing EU business to their newly created subsidiaries,” it added. [Editor’s note: Part VII transfers, in part, enable a UK insurer to transfer its cross-border contracts into an EU subsidiary.]
Rationale Varies for EU Domiciles
While Luxembourg and Ireland have emerged as the popular EU domiciles for UK insurers, A.M. Best commented, “no single city appears likely to challenge the position of London as Europe’s principal re/insurance hub.”
The choice of domiciles is driven by the needs of individual insurers, including proximity to clients, the available talent pool, an existing presence in a location (such as a branch), the local tax regime and the approach, expertise and accessibility of the domestic regulator, the Best’s Briefing explained.
However, the principal driver of the chosen EU domicile is whether there is an existing operation, the report affirmed.
“Where companies have established branches or a material presence in a particular market, it is usually because they believe it will help them access attractive business,” A.M. Best explained. “In addition, they will already have underwriting talent and infrastructure in place at that particular location, and they will usually have a relationship with the local regulator.”
Amlin and QBE have selected Brussels as their EU domiciles — decisions that were “largely driven by the fact that they have an existing presence there,” said the report.
It noted that Beazley, Aspen and XL chose Dublin because they had operations in that city, while Chubb opted for Paris for similar reasons, as did Markel when it decided to locate its EU headquarters in Munich.
While Lloyd’s did not have business or operations in Brussels previously, it chose this domicile as the location for its EU subsidiary due to the strength of the regulatory framework, said Mathilde Jakobsen, A.M. Best director, in emailed comments.
“In cases where an insurer does not have existing operations in an EU location, Luxembourg is proving to be an attractive domicile,” the briefing said, noting that the local regulator is viewed as business friendly and efficient, while the domicile has good support services such as lawyers and accountants.
“In each of these chosen locations, A.M. Best expects subsidiaries to be small relative to the insurer’s UK operations,” the report stated.
“London is likely to remain one of the world’s leading insurance centers and the principal insurance hub in Europe, supported by its pool of underwriting talent and access to related services,” the report added.
Cost Implications of EU Units
The Best’s Briefing pointed to the cost of setting up new risk carriers in the EU, which is weighing on insurers and will impact their earnings.
Further, the formation of a separately capitalized subsidiary in the EU “may reduce the fungibility of capital across an insurance group and its capital efficiency,” the report affirmed.
As a result, insurers are seeking “to reduce capital requirements at these new subsidiaries and minimize trapped capital,” it continued. “One way to achieve this is to transfer material underwriting risk back to other group entities through reinsurance.”
However, such moves would require a nod from regulators, who also will be key “in determining what constitutes a meaningful presence in a particular market…”
A.M. Best provided a list of the planned re/insurance domiciles in the EU, as of June 27:
- Lloyd’s: Belgium
- MS Amlin: Belgium
- QBE: Belgium
- Chubb: France
- Ironshore (Ironshore International’s Mergers & Acquisitions and Tax Insurance unit): Germany
- Markel: Germany
- St. Julians (transfer of domicile from Malta): Gibraltar
- Aspen: Ireland
- Aviva: Ireland
- Beazley: Ireland
- Chaucer: Ireland
- Equitable Life: Ireland (to be confirmed)
- Everest Insurance: Ireland
- Legal & General: Ireland
- NEON Underwriting: Ireland (to be confirmed)
- North P&I Club: Ireland
- Royal London: Ireland
- Standard Life: Ireland (to be confirmed)
- The Standard Club: Ireland
- Travelers: Ireland
- XL Group: Ireland
- Sompo Japan Nipponkoa Insurance: Luxembourg
- AIG: Luxembourg
- Aioi Nissay: Luxembourg
- CNA Hardy: Luxembourg
- FM Global: Luxembourg
- Hiscox: Luxembourg
- Liberty Specialty Markets: Luxembourg
- RSA: Luxembourg
- Tokio Marine: Luxembourg
- Starr: Malta
- Compre (transfer of London & Leith Insurance SE): Malta
- The UK P&I Club: Netherlands
- Steamship Mutual: Netherlands
- Chesnara: Netherlands
- Admiral: Spain
Source: A.M. Best
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