The Current Position
Under EU law, insurers which are based and regulated in one EU country may carry out insurance in any other EU country under Freedom of Services (FOS) regulations. This extends to include insurers from countries which are part of the wider European Economic Area (EEA) – Iceland, Liechtenstein and Norway and applies to all classes of insurance, including compulsory lines such as Motor TPL.
A broker which is licensed in one EU/EEA country may place business in any other EU/EEA country.
The FOS regulations thus provide a flexible and homogenous EU/EEA wide market for insurance, regardless of specific local insurance laws which may apply in any individual country.
The country-specific premium and other insurance related taxes must be levied on the premium applicable to that country, regardless of where the insurance is placed. So, for example, if a UK-placed policy covers UK and France, UK IPT must be charged on the UK portion of the total premium and French IPT must be charged on the French portion.
Premiums paid by a client in an EU/EEA country to an insurer based in another EU/EEA country are tax-deductible.
How has this been of benefit to UK brokers and insurers?
The ability to operate under FOS rules has allowed brokers and insurers which do not have their own operations in other EU/EEA countries to place cover across those countries without legal or fiscal difficulties. This has meant that smaller brokers and insurers have not needed to develop any local presence, thus saving the costs involved in building and maintaining such resources.
What will change after Brexit?
At this stage it is unclear, but there are different scenarios:
- The UK continues to operate under FOS rules
- The UK drops out of the current EU/EEA arrangement completely and can no longer operate under FOS rules
- Some partial arrangement is adopted under which the UK gets some degree of access to EU/EEA markets
It is impossible to predict what any compromise deal which might fall under no. 3 might look like. Initially, hopes were high that UK financial services businesses would be able to continue to trade freely across the EU/EEA, but this optimism now seems to have been misplaced and the “Chequers” proposal for a possible future trade deal refers to “goods” and not “services”. This implies that there might be “no deal” for insurance.
In the absence of any insight into what the negotiators might agree ultimately, we should focus on the best and worst-case scenarios.
If UK brokers/insurers continue to trade under FOS rules, then nothing will change. The existing ability to operate without having to establish companies in other EU/EEA countries, or enter into reciprocal partnerships with local brokers/insurers, will perpetuate unhindered competition with those brokers/insurers which already have such international reach.
It is far less obvious, however, that the absence of a local broker/insurer capability is beneficial to clients, as their local managers will not have access to a local, face-to-face, same language service and difficulties may be experienced in providing key services such as certificates of insurance, contract vetting and claims handling.
Before considering how the removal of the ability to trade under FOS rules might affect UK brokers/insurers, it is necessary first to look at how EU countries currently treat the placement of cover with insurers outside of the EU/EEA. In that context, there is an accepted definition of such insurance, which is known as Non-Admitted.
Non-Admitted (NA) insurance refers to the placing of insurance outside the regulatory system of the country in which the risk is located. A NA policy may be one that is issued abroad, or one in which the risk(s) may be included in a global master policy by an insurer that is not authorised in the country in which the risk is located.
If the UK were outside of the FOS structure, then any insurance placed in the UK for a risk located in an EU/EEA country would be regarded as NA insurance and thus subject to the laws applicable in the individual country in which the risk is located.
Such local laws vary and would thus treat NA placements in a range of ways, including:
- Generally, throughout the EU/EEA, local laws state that insurance may be written only by insurers which are authorized in the country in which the risk is based
- Most countries require that compulsory covers such as Motor TPL and Workers’ Compensation/EL be written locally
- In some countries (such as Belgium, France, Ireland, Italy, Portugal and Spain) the law states that NA insurance is not allowed for non-compulsory classes, but may make some exceptions – usually for marine and aviation
- In other countries (for example, Denmark, Greece and Netherlands), NA is allowed for non-compulsory classes
- The law in some countries is silent on whether a local buyer is obliged to arrange any non-compulsory covers with a local insurer. In a few, however, it is made clear that a NA placement may not be made by a local broker
- Even where NA placements are allowed (or not expressly forbidden), premiums paid to a NA insurer are usually not tax-deductible
- Placements with NA insurers, even where allowed, do not qualify for any protection by the regulator (and thus any compensation schemes) in the country in which the risk is based.
Consequently, if brokers/insurers in the UK were no longer able to place cover for a client with exposures in one or more EU/EEA countries, they would have to ensure that any future arrangement would be compliant with all relevant local insurance and taxation laws and practices.
Even where NA insurance might be allowed, or not forbidden, it would still be necessary to consider any possible negative impact of the loss of tax-deductibility of premiums and whether this would outweigh any savings achieved by not having local policies in each country.
In this scenario, the only truly safe way to ensure that cover for a pan-European client is compliant is to issue local policies which fulfil the requirements of local laws. This does not necessarily mean that a separate policy would have to be issued in each territory, as FOS rules would still apply to the remaining EU/EEA countries after Brexit. In practice, therefore, it is likely to be acceptable to have one policy (for any non-compulsory class) issued in the UK for the UK risks and one policy issued in an EU/EEA country for the risks in all other countries.
Many insurers have already established separate EU companies, through which they plan to issue EU/EEA policies after Brexit, and UK companies for UK policies.
Brokers will either need to set up similar structures to facilitate the placement of cover and provision of service to the EU/EEA subsidiaries of their UK clients, join established broker networks or develop partnerships with local brokers across the EU/EEA.
Those brokers which cannot ensure that their clients will have compliant post-Brexit arrangements will be at a significant disadvantage to those which can. At best they will lose some or all the clients concerned and at worst they may risk being accused of negligence for not addressing the issues. In the latter example, professional indemnity insurers are unlikely to be sympathetic, especially if the broker has made little or no attempt to ensure that their customer’s cover meets local standards.
What actions should a UK broker take before Brexit?
The best advice is to assume the worst!
If it transpires that the UK may leave the EU without a deal which allows brokers/insurers to place cover for EU/EEA risks under UK policies, and you are already doing this for any client, the following actions should be considered prior to next renewal date (especially if this falls after the date of the UK’s exit from the EU):
- Ask the current insurer(s) how they plan to issue compliant local EU/EEA policies
- If they will not, or may not, have the facility to do so, consider switching the cover to insurers which can – possibly mid-term
- Advise the client of the options and possible need to change insurers
- Do not enter into any long-term agreements unless you are sure that the insurer(s) will be able to issue compliant local cover post-Brexit
- Establish relationships with local brokers in the countries concerned, if these do not already exist, and discuss the desired action and timescale for the issuance of new local policies and the provision of local service to the client’s local managers
For any new client, or one which is opening an operation in the EU/EEA for the first time:
- Explain that you can only work with insurers which are going to be able to issue compliant local cover outside the UK (and, by implication, throw doubt on any competitor who might suggest using an insurer which cannot do this)
- Alert any existing client that their new risks in the EU/EEA might necessitate a change of insurer – possibly mid-term
- Engage the local brokers in the countries concerned.
- The implications of any Brexit deal on the insurance industry are not likely to become apparent for some time and possibly not until after the UK leaves the EU
- It would not be sensible to wait for clarity about any possible Brexit deal before lining up alternative plans for each client which may be affected
- Do not renew any current FOS placement unless you are certain that this will not need to be replaced post-Brexit
- If you have cover placed with an insurer which is not likely to be able to offer 100% support and compliance post-Brexit, make sure they will agree not to tie the client into a non-compliant arrangement
- If you do not have knowledge about, or experience of, the placement or management of international insurance programmes which require the issue of compliant local policies and the provision of local broker service, consult with those who do