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.

Liability insurers are facing a huge increase in potentially silent exposures as a result of the increased litigation and compensation claims expected following implementation of the EU General Data Protection Regulation (GDPR).

A DAC Beachcroft report that polled lawyers across the EU found that 80 percent of respondents expected the GDPR to increase litigation and compensation claims – which are typically insurable under liability policies.

“Litigation can really cost insurers and this increasing exposure is potentially a sleeping giant,” DAC Beachcroft partner Hans Allnutt told The Insurance Insider. “This issue is going to be acute in the UK because of a favourable litigation regime, but our report shows this is a pan-European issue.

“Because the GDPR is also aimed at corporations outside Europe, the GDPR represents a global data risk.”

The GDPR, which reforms existing data protection law and comes into force in May 2018, requires companies to notify clients of a data breach within 72 hours of discovery, and enables individuals to claim compensation for data protection breaches.

“There is an increasing recognition of the need to put individuals back in control of their privacy and personal data against the backdrop of big data,” said Allnutt. “The balance of power is tipping away from companies. This is reflected by increasing litigation across the whole of Europe. GDPR supercharges that trend.”

The maximum fine for breaching GDPR rules is the higher of EUR20mn ($23mn) or 4 percent of a company’s total worldwide annual turnover.

Cover for GDPR compensation claims and legal costs is available under affirmative cyber policies, but Allnutt warned there would also be claims submitted under several types of liability policies, such as professional and general liability.

Insurers are getting their head around silent cyber because of recent statements issued by UK regulator the Prudential Regulation Authority, but they should also be aware of silent data risk, he said.

“The same attention to wordings needs to be given around the silent data risk with the GDPR,” Allnutt added.

Current Data Protection Act-insuring clauses and exclusions need to be scrutinised now in anticipation of the GDPR coming into effect next May, he continued.

“Just as for cyber risk, insurers need to decide their appetite for insuring liabilities for privacy breaches. They should be aware that privacy liabilities extend beyond just the GDPR, so if they do not want to insure this risk, they should look at their current exclusions and be mindful that a simple GDPR exclusion might not be wide enough.”

One grey area is the insurability of GDPR fines. Allnutt said it was difficult to cite a single law that explicitly stated that GDPR fines were uninsurable.

“The lack of clarity over whether fines are insurable has caused some frustration but I do think the issue is akin to sanctions exclusions,” he said. “Everyone accepts that an insurer would not make a payment to a company that would breach sanction laws.”

Lloyd’s has filed an application with the Belgian regulator to form an insurance company that will allow it to continue to write European Economic Area business after Brexit takes effect.

The application was filed with the Belgian central bank in mid-October following lengthy pre-application discussions.

With the gestation of Brussels-based Lloyd’s Insurance Company SA broadly progressing as planned, the market should be on track to write business via the entity for the January 2019 renewals.

Assuming it gains the go-ahead, the entity expects to write risks from a region which accounted for about 11 percent of Lloyd’s 2016 premiums through the market’s current distribution channels of brokers, coverholders and managing agents.

The Corporation has also indicated to stakeholders that it was confident a clampdown on reinsurance cessions by the EU insurance regulator would not derail plans for the new subsidiary.

Recent suggestions by the European Insurance and Occupational Pensions Authority that it wanted Brexit satellites to keep 10 percent of the risk written by their new EU subsidiaries had briefly appeared to jeopardise Lloyd’s planned Brussels set-up.

Lloyd’s had selected Belgium as the location for the new unit in part because of the understanding that the new company could cede 100 percent of the risk to London.

The 100 percent cession goal reflects Lloyd’s aim to establish a capital-light entity in Brussels that would be regulated under the Solvency II standard formula.

Once it has gained Belgian approval, Lloyd’s European subsidiary will apply to the Prudential Regulation Authority (PRA) to establish a third-country branch in the UK.

This would allow staff in the UK to carry out regulated activities on Lloyd’s Insurance Company’s behalf when Britain leaves the EU.

The UK branch plan negates the need for intermediation to take place in Europe and for intermediaries to require authorisations from the local conduct regulator.

The PRA has traditionally preferred the subsidiary model over branches, but is thought unlikely to object to Lloyd’s Insurance Company’s UK branch since it is the main regulator of the Corporation itself.

Lloyd’s is also understood to have resolved questions over financing of the entity.

It has opted against the pay-to-play model favoured by some carriers that have other European operations they can utilise. This would have mirrored the structure used for Lloyd’s China.

Instead, the costs will be funded centrally, with all managing agents effectively paying in regardless of whether they decide to use the platform.

Lloyd’s CEO Inga Beale has previously said that the Corporation is likely to have 10 to 20 Brussels-based staff initially, with around 60 overall in continental Europe.

The staffing plans of Lloyd’s have yet to be disclosed, but it has previously said the Brussels workforce would be “in the tens”.

Other elements yet to be decided include Lloyd’s Insurance Company’s IT infrastructure, with a tender still to be launched.

One adviser noted that larger companies with both Lloyd’s and company market operations generally expected to use the Lloyd’s platform as well their own planned EU hubs to write risk.

UK carriers looking to establish EU subsidiaries for Brexit face less room for manoeuvre after the European Commission (EC) issued plans to bolster the bloc’s financial regulators at the expense of national watchdogs.

The EC’s proposals would give the European Insurance and Occupational Pensions Authority (Eiopa) greater powers to promote “convergence” among national insurance regulators in the way they supervise internal models under Solvency II.

Eiopa and the other so-called European Supervisory Authorities (ESAs) would set EU-wide priorities for their respective sectors and vet how national watchdogs fulfil that remit.

The plans, part of the EU’s three-year-old Capital Markets Union project, elicited some accusations of a regulatory power grab, while Insurance Europe called for clarification of the proposed “material increases” in both Eiopa’s scope of activities and the new regime’s oversight mechanisms.

Mazars partner Sarah Ouarbya said that the proposed strengthening of central powers “should level the playing field even more across the EU”.

“Insurers that have chosen a country because they perceive the national regulator as being more pragmatic than others may find that advantage is lost over time,” she added.

Ouarbya also noted that references in the EC documentation to the delegation and outsourcing of business functions to non-EU countries could stymie some UK groups’ plans.

“Many banks and insurance companies are working on the basis that they will be able to delegate or outsource business functions back to the UK from their new EU hub,” she added. “These plans may be disrupted if additional barriers are put in the way and there is a distinction between EU and non-EU outsourcing.”

Herbert Smiths Freehill partner Geoffrey Maddock concurred.

“From firms’ point of view, the clear concern will be that once Eiopa has exerted greater control over this area, it will be able to make life increasingly difficult for groups who wish to retain most activities in the UK by means of reinsurance/outsourcing,” he said. “So the key will really be what actual behaviour follows from Eiopa, and whether it is reasonably based on legitimate financial stability/policyholder protection grounds or is more motivated by protectionist anti-third country objectives.”

Last week’s proposals follow edicts from the European Securities and Markets Authority (Esma) and Eiopa designed to stamp out the creation of “letterbox” entities within the EU to house UK subsidiaries.

Under the latest proposals, the ESAs would take decisions more independently from national interests, with newly created executive boards speeding up the decision-making process.

Funding of the ESAs would also be separate from the national supervisors to ensure independence.

The EC said there would be a mechanism for interested parties to appeal to the EC if a majority think the ESAs have overstepped the mark.

In issuing the proposals the EU executive abandoned the prospect of a merger of the European Banking Authority and Eiopa – a concession that Insurance Europe welcomed.

Also on the positive side, Ouarbya said that UK insurers would generally welcome more consistency in the way that internal models are validated across the EU, given the Prudential Regulation Authority’s tough reputation in this regard.

The proposals take the form of an omnibus text, which amends existing legislation.

They will now be discussed by the European Parliament and the European Council.

The EU securities and markets regulator has warned national watchdogs against companies hoping to set up thinly staffed “brass plaque” entities ahead of Brexit.

In an advisory statement aimed at national EU regulators, the European Securities and Markets Authority (ESMA) issued guidelines for avoiding “regulatory arbitrage” between the 27 countries that will be left in the EU after the UK leaves the bloc.

ESMA said local regulators in the EU should “reject any relocation request creating letterbox entities”.

This would include a company looking to set up an EU operation to gain passporting rights while “essentially performing all substantial activities or functions outside the EU27″, ESMA said.

Paris-based ESMA works with the European Insurance and Occupational Pensions Authority and the European Banking Authority to promote “supervisory convergence” across the EU.

In its document, ESMA chairman Steven Maijoor said: “The UK plays a prominent role in EU financial markets and the relocation of entities, activities and functions to the EU27 creates a unique situation requiring a common effort, at EU level.

“Firms need to be subject to the same standards of authorisation and ongoing supervision across the EU27 in order to avoid competition on regulatory and supervisory practices between member states.”

The watchdog said it expects senior executives in newly established EU units to be actual decision-makers. ESMA noted that even when the entity is part of a bigger corporation, local board members and senior managers must be employed in the country they move to.

ESMA also urged financial services firms to hurry up with Brexit relocation plans.

“The authorisation process takes time,” the watchdog noted. To ensure efficiency, ESMA recommended companies approach local regulators “as early as possible”.

ESMA’s intervention comes as carriers weigh their post-Brexit location options, and it could curtail the benefits of shopping around.

Although all EU member states are bound by the same Solvency II requirements, national jurisdictions have diverged on staffing requirements, carriers have said.

Lloyd’s has already decided to set up an EU subsidiary in Belgium, while AIG is setting up a new European headquarters in Luxembourg, as are FM Global and Hiscox.

No major carrier has yet announced plans to relocate to Dublin, where staffing requirements are perceived to be more stringent.

The ESMA document called for local regulators to dismiss applications for licences from financial services companies looking for a laissez-faire regulatory regime.

Regulators should veto applications “where the activity carried out indicates clearly that the entity has opted for the legal system of a member state for the purpose of evading the stricter standards in force in another member state”.