February 2018

The International Underwriting Association (IUA) is seeking regulatory leeway on a proposed threshold after which European carriers with consumer-facing operations would have to convert their UK branches to subsidiaries for Brexit.

The Prudential Regulation Authority (PRA) has since December been consulting on a proposal to supervise European Economic Area (EEA) commercial carriers as third-country branches after Brexit, instead of making them become separately capitalised subsidiaries.

The proposal will relieve most of the 80 EEA carriers operating branches in the UK from the need to convert to subsidiaries that are controlled and capitalised locally. However, it is contingent on what the IUA considers an ill-defined proviso that their operations do not involve retail insurance.

The proposal specifies a threshold of £200mn ($278.4mn) for “Financial Services Compensation Scheme-protected liabilities”, above which the branches would have to become subsidiaries. The IUA fears the relatively low limit could pull in a number of commercial carriers.

CEO Dave Matcham said: “The IUA hopes that such a limit will not be rigidly applied and that other factors offering policyholder protection will also be taken into consideration,” the organisation said in comments released to this publication.

“We would like to see greater clarity about the new factors to be considered alongside current requirements for third-country branch authorisation.”

Overall, however, the executive welcomed the PRA’s plan for dealing with Brexit.

“It suggests there will continue to be a high degree of supervisory cooperation between the UK and EU and that, provided they are not conducting material retail business in the UK, firms may apply for authorisation as a branch,” Matcham added.

In its December consultation paper, the PRA noted that it has a “greater ability to mitigate risks in subsidiaries as it has access to a wider range of supervisory tools and legal powers. Accordingly, we expect a firm above a certain threshold to subsidiarise.”

It also noted that the proposed £200mn threshold for FSCS-protected liabilities as not a “hard limit”.

Despite qualms over the retail threshold, the PRA’s blueprint in the main represented a major unilateral concession to EEA insurers and banks as the regulator marked a pathway for cooperation with peer supervisors. Its plan for the insurance sector mirrors its thinking on banks.

In December the PRA made the proposals subject to Brexit negotiations yielding no unexpected surprises and to it garnering “sufficient supervisory cooperation and assurance on resolution” from carriers’ home state regulators.

In tandem with the PRA December announcement, the UK Treasury said it would legislate to ensure that EEA carriers in the UK could continue to pay claims on existing policies after Brexit.

However, the outlook for contract fulfilment for UK insurers operating in certain EEA countries is less certain, save for those which already have plans to establish EU subsidiaries in train.

The London Market Group noted in November that £6bn ($8bn) of premium written in the London market emanates from carriers with an EU base.

About 2,400 EU nationals work in the London insurance market out of a workforce of 52,000, while EU carriers have 6 million policyholders in the UK.

The PRA began accepting applications for branch authorisations at the start of the year. It expects about 200 applications between now and March 2019, up from an average of 12 a year.

Its consultation on the branches proposal ends on 27 February.

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