UK’s approach to post-Brexit insurance branch authorisation and supervision

Risk Advisory alert | 11 January 2018


On 20 December, the UK regulatory authorities and HM Treasury announced their eagerly-anticipated policy approach to post-Brexit authorisation of international insurance branches. Overall, it was welcome clarification and good news for EEA firms. The Prudential Regulation Authority (PRA) confirmed that it does expect, in principle, to permit some EEA firms to operate in the UK as branches following Brexit, and that these branches will be subject to the same regime that the PRA applies to branches from third-country regimes currently. In particular:

  1. EEA insurers that are not writing material retail business, defined as those with Financial Services Compensation Scheme[1] (FSCS) protected liabilities of under £200 million and which do not pose a risk to the wider insurance market and financial system of the UK can apply from January 2018 for authorisation as third-country branches following Brexit.
  2. New third-country branches will be subject to the PRA’s existing third-country branch regime. In particular, the PRA’s current regime requires third-country branches to hold assets in the UK to cover the branch Minimum Capital requirement (MCR) and further assets in the EEA up to the amount of the branch Solvency Capital Requirement (SCR), and must invest branch assets in accordance with the PRA’s Prudent Person Principle.
  3. The UK government has committed to legislate if necessary to enable a temporary permissions regime in the UK and to provide service continuity for cross-border contractual obligations. The PRA plans to use temporary permissions only as a last resort, but sole-Financial Conduct Authority (FCA) regulated firms (over 5700 inbound insurance brokers, agents and intermediaries) will able to obtain a temporary FCA permission by notification only.
  4. UK firms that provide services into the EU27 will need to factor the European Insurance and Occupational Pensions Authority’s (EIOPA) recent opinion on service continuity into their contingency plans.

For many firms, their ability to execute their contingency plans will depend on the timely receipt of regulatory licences. As more firms submit applications, regulators’ resources will come under pressure and we expect them to take a “first come, first served” approach. Given time pressures and the risk of process logjam, firms should be proactive in anticipating and responding to likely areas of supervisory review and enquiry. This note explains the PRA’s expected key considerations in deciding whether it will require a UK subsidiary for an international firm’s UK insurance business, or if the firm can seek authorisation as a third-country branch. The PRA’s approach is not expected to affect the existing operations of

[1] The FSCS is the UK's statutory Deposit insurance and investor compensation scheme for customers of authorised financial services firms. The FSCS is able to compensate customers if a firm has stopped trading or does not have enough assets to pay claims made against it. The PRA sets out in its consultation paper that for non-life insurance, FSCS-protected liabilities amount to policies held by individuals and micro-businesses (turnover up to £1 million) and all policyholders of compulsory insurance (mainly motor and employer liability). For life insurance, essentially all policyholders are covered by the FSCS. Further details on FSCS protected liabilities can be found on the FSCS website.

Approach to branch authorisation and supervision for international insurers

The PRA published its consultation paper 30/17[2] containing a draft supervisory statement (”SS”) which sets out the factors it considers relevant for the authorisation of branches or subsidiaries of internationally-headquartered insurance firms. Once finalised, the new SS will sit alongside the existing SS44/15Solvency II: third-country insurance and pure reinsurance branches” which expands on the PRA’s general approach to insurance supervision.

[2] The consultation closes on 27 February 2018.

Building on existing standards for third-country branches

The PRA’s existing approach for authorising a third-country branch already turns on the assessment of regulatory equivalence of the home jurisdiction, the “overall supervisability” of the insurer operating through a branch, and the treatment of UK policyholders in the event of insolvency. In particular, the PRA places considerable weight on the extent and quality of cooperation with the home state supervisor.

The PRA states clearly that EEA firms can plan on the assumption that its expectations in respect of these requirements will be met, and can therefore apply for authorisation as third-country branches if they are not conducting material retail business. The PRA has, however, also made clear that this assumption may be revisited as Brexit negotiations proceed.

Building on this approach, the PRA has set out two new criteria that it will consider for the authorisation of third-country insurance branches. These criteria effectively extend the PRA’s existing approach of requiring third-country banks with material UK retail deposits to operate through subsidiaries[3].

The new criteria are:

  1. the scale of UK branch activity covered by the FSCS; and
  2. the impact of the failure of a firm with a UK branch on the wider insurance market and financial system.

[3] We have considered the PRA’s publications on bank authorisations in a separate note.

FSCS-protected liabilities over £200 million

The PRA considers the level of FSCS liabilities to be a strong indicator of the risk that a branch poses to both policyholders and FSCS levy payers. The PRA therefore expects firms with FSCS-protected liabilities above £200 million to apply for authorisation as a subsidiary, although it will not treat this as a hard threshold.

Similar to PRA’s existing approach on banking retail deposits, the PRA expects insurers with material retail insurance business to operate as subsidiaries. In its consultation, the PRA has requested views on alternative approaches to defining a threshold e.g. one focussed on a narrower set of liabilities which are directly “retail” and might exclude some insurance liabilities protected by the FSCS such as compulsory insurance taken out by larger, commercial firms. However, the PRA notes that this may not be appropriate as the end recipients of compulsory insurance held by commercial firms are likely to be individuals.

Impact of failure on the wider insurance market

The PRA may still require a firm with expected FSCS-protected liabilities below £200 million to set up a subsidiary if the PRA considers the firm nonetheless poses a risk to the wider insurance market and financial system of the UK.

Additional relevant factors that the PRA will consider to assess a third-country branch’s potential risk in these regards include:

  • the availability of substitute products that would offer a policyholder a similar level of protection;
  • the branch’s position in the market, particularly assessing the size of the market share in a niche market;
  • the level of connectivity of a branch to the industry it operates within: for example, the extent and complexity of inter-firm transactions; and
  • the significance of the UK operations of the third-country branch compared to the amount of business within other jurisdictions.

The PRA indicates that no third-country branch currently operating in the United Kingdom would, as a result of these factors, be deemed sufficiently significant to the wider insurance market and financial system for it to be required to subsidiarise.

Service continuity for cross-border contracts

EEA firms

There was further good news from the UK government as it confirmed that it will, if necessary, bring forward legislation to enable EEA firms to obtain a “temporary permission” to continue their activities in the UK for a limited period after withdrawal, and that alongside the temporary permissions regime, the government will legislate, if necessary, to ensure that contractual obligations, such as insurance contracts, which are not covered by the temporary permission regime, can continue to be met.

While the PRA plans to use the temporary permission regime only as a last resort, the announcement on insurance contract continuity will be welcome for EEA firms that have written cross-border contracts to UK policyholders.

UK firms

It is important to note that these proposals only cover contractual obligations in the UK. EIOPA also recently issued an opinion reminding EEA supervisory authorities and insurers (including UK insurers) that they need to take steps to ensure that existing contracts can continue to be fulfilled by firms after Brexit. The options envisioned by EIOPA for UK firms with EU27 policyholders under the current legal framework include:

  1. transfer of insurance contracts to an EU27 legal entity;  
  2. establishment of third-country branch in the EU27 Member State of the policyholder; or
  3. change of domicile of a company to an EU27 member state. 

EIOPA plans to monitor the development and implementation of contingency plans to ensure service continuity, in conjunction with national supervisors.

Insurance brokers and intermediaries

The FCA expects to set out further detail on its approach to authorisation in 2018. However, it has indicated that for sole FCA-regulated firms, a notification before the exit day, rather than an application, will be sufficient to benefit from a temporary permission.

This is a significant and welcome development for inbound EEA insurance intermediaries, as the FCA has previously indicated that over 5700 EEA firms[4] benefit from an inbound Insurance Mediation Directive (IMD) passport into the UK. The FCA also encourages firms based in the UK and servicing clients in the EEA to continue to prepare for a range of scenarios and to engage with relevant EU regulators.


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