March 21, 2018 / 1:54 PM / a month ago

Cross-border policies keep insurers up at night before Brexit

LONDON (Reuters) - Insurers in Britain are getting ready to shift business to Europe in their first “irreversible” Brexit move to continue paying claims on policies bought by millions of customers, industry officials say.

Anti-Brexit demonstrators wave EU and Union flags outside the Houses of Parliament in London, Britain, January 30, 2018. REUTERS/Toby Melville

Britain was hoping the transition agreed with the European Union on Monday would persuade financial firms to avoid moves that could damage the financial industry, its biggest tax payer.

But like banks and asset managers, insurers say in practice transition means more time to implement plans for coping with Britain’s departure from the EU, not changing their plans.

“The insurance industry has not waited for the political process to deliver outcomes that will enable it to avoid the logical consequences of Brexit, that is leaving the single market,” Huw Evans, director general of the Association of British Insurers, told Reuters.

Many ABI members are seeking court approval to transfer business to EU hubs and end uncertainty over policies, Evans said.

Lloyd’s syndicate Beazley BEZG.L has said it is setting up a new subsidiary in Dublin. Hiscox (HSX.L) is going to Luxembourg.

Ten million British policyholders and 38 million European policyholders with business worth more than 80 billion pounds ($112 billion) don’t know if their insurers could pay out on a claim after Brexit, the Bank of England has said.

“Insurers keep telling us that this question is what keeps them awake at night,” said Nicolas Mackel, chief executive of Luxembourg for Finance, which promotes the duchy as a financial center.

Bruce Carnegie-Brown, chairman of Lloyd’s of London, the world’s biggest commercial insurance market, said using the same valuer for transferring policies would help speed up the legal process, rather than each syndicate hiring its own.

“We’re a long way from the courts and actually the whole transition arrangements announced this week are helpful in that regard because they give time to get ourselves organized,” Carnegie-Brown said.

MOVING CLIFF EDGE

Moving contracts, like relocating staff, is an “irreversible” step - companies do not want to repeat the legal process or have to obtain customer approval again.

Insurers are not alone. It is unclear if it would be legal to amend derivatives contracts to reflect “lifecycle events” like rolling forward positions. The BoE has said derivatives trades worth about 26 trillion pounds ($36.55 trillion) between EU and British parties may be affected.

“We welcome progress on the transition agreement, but it’s important we have a solution that allows all lifecycle events to continue on existing derivatives trades between UK and EU counterparties,” said Scott O’Malia, chief executive of ISDA, a global industry body.

Banks in Britain are also readying to “repaper” or transfer accounts from London to EU hubs.

Chris Bates, a partner at the law firm Clifford Chance, said transition simply pushes the Brexit “cliff edge” to the end of 2020.

“The draft does not contain provisions dealing with legacy contracts at the end of the transition. This may be dealt with in any long-term agreement if that comes into effect immediately at the end of transition,” Bates said.

The BoE has said a transition deal won’t be enough to avoid disrupting cross-border financial contracts.

While Britain is willing to legislate on cross-border contracts, Brussels has been silent in the face of industry calls to “grandfather” them - give legal permission for multi-year cross-border contracts to run their course.

This EU stance, lawyers say, is aimed at putting pressure on financial firms not to delay opening new EU hubs or move business and staff to existing ones.

AIR COVER

Carnegie-Brown is confident grandfathering will be agreed at some stage.

“These contracts were entered into in good faith, and a bit like Deutsche mark contracts and French franc contracts were grandfathered into the euro, the same should happen here and it’s slightly disappointing that it hasn’t already happened,” he said.

Financial firms hope that grandfathering will be slipped into the wider withdrawal agreement being negotiated between Britain and the EU.

“The problem is that this will have to come somewhere near the end of the negotiations,” Mackel said.

Britain and the EU aim to ratify the withdrawal agreement, which contains transition arrangements, by October, too close to Brexit day for some financial firms to rely on.

British regulators say a transition deal could give “air cover” for them and their EU counterparts to begin discussing how to tackle supervisory issues like contracts. But European regulators say transition needs to be ratified first.

“It would be ridiculous for people to have paid out their premiums and not be able to claim on their contracts at the end of the day. It’s in all our interests to find a solution,” said Catherine McGuinness, City of London policy leader.

($1 = 0.7114 pounds)

    Additional reporting by Carolyn Cohn, editing by Larry King

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