Each month we will be meeting with lawyers from around the firm to provide a series of industry perspectives in relation to current affairs.
This month, we've sat down with Partner Nigel Feetham QC to discuss, among other things, the insurance industry in Gibraltar and how it is facing the challenge of Brexit.
Q: What are the challenges presented by Brexit to the Gibraltar insurance industry?
A: Brexit has been the key focus of my professional work over the last 3 years.
As a consequence of the UK's decision, which also includes Gibraltar, to leave the European Union, a likely scenario in the event of a hard Brexit is that Gibraltar and UK insurance companies will lose their rights under European Union law to continue to do insurance business across the European single market. These rights under European Union law are known as "passporting rights". There have been concerns that following a hard Brexit UK and Gibraltar insurers will not be able to continue to service policyholders and claimants across Europe in line with applicable regulatory rules, known as contract continuity.
As a result, I have been advising Gibraltar insurance companies, including captives, on Brexit contingency plans and their implementation. There are three Brexit-related contingency options apart from run-off, namely, a statutory portfolio transfer, setting up a new insurer, and re-domiciliation.
Q: Can you briefly take us through each of the scenarios of portfolio transfer, new insurer and redomiciliation, and what the challenges are in each case?
The first is a portfolio transfer of EU insurance liabilities to an EU insurer as transferee. This would then enable the U.K. or Gibraltar insurer to focus on their U.K. and international business whilst allowing existing EU policyholder claims to be paid through the EU insurer. Portfolio transfers, however, are expensive to execute. You have legal, regulatory, actuarial and other business costs associated with the process, such as newspaper advertising and publicity requirements. This can take a substantial amount of time to complete due to regulatory and policyholder consultation periods, together, in cases where court approval is required, of obtaining the directions and sanctions court hearing dates. EIOPA have helpfully published recommendations supporting the process, permitting portfolio transfers that have been 'initiated' prior to Brexit to be completed.
However, some of the smaller insurers may not have the financial resources - deep pockets - necessary to undergo a portfolio transfer. Transferring books of business is not just costly from a process perspective, it would also require assets and reserves supporting those insurance liabilities to move across and therefore the transaction must have a willing buyer.
The second scenario is a redomiciliation. In other words, 'moving' the company to another European Member State. You can achieve this through a merger in the case of a UK company, or redomiciling the company in the case of a Gibraltar company. The latter process involves an insurance licence application to an EEA state regulator, can therefore also take a substantial amount of time, and is only suitable for companies that undertake EU business. The process can obviously be disruptive since it requires a change of management and board composition but is also dependent on the EU Regulator granting the insurance licence, which it could do subject to conditions, or even declined as the case may be.
The third scenario is setting up a new licensed insurer in the EU but this requires separate capitalisation and a portfolio transfer from the UK/Gibraltar insurer of its EU liabilities and is therefore subject to the same limitations as scenario 1 and 2.
Where does it leave insurance companies that cannot undergo any of these scenarios 1, 2, or 3? Under the last potential scenario, EIOPA have requested EEA...