Description of sector
Insurance business operates by firms writing insurance policies for clients,intermediated by brokers (which may include retail brokers and wholesale brokers and London Market brokers). Insurance firms in turn can pass on excess risk to reinsurance firms, via reinsurance brokers. Insurance underwriting requires large amounts of capital, so the industry tends to be dominated by large firms. The broking market on the other hand features large numbers of small specialist participants.
The current EU regulatory regime
The two key pieces of European legislation affecting the insurance sector are:
The Solvency II Directive
The Solvency II directive is a harmonised system of regulation of the risks facing insurance companies. Solvency II’s main provisions concern insurers’ risk management systems; the capital needed to ensure solvency; reporting; and coordination between national regulators.
Solvency II’s market access rules allow an authorised EEA insurer to conduct business anywhere in the single market on a cross-border basis (i.e. with no local presence). To do this, they need only notify their home and host regulator. UK insurance companies hold a passport to conduct business in the rest of the EEA and 726 insurance companies hold a passport to trade into the UK from the rest of theEEA. In contrast, the directive requires non-EU insurers seeking to operate in the EU to establish a branch in each country or establish an EU subsidiary. This is subject to the permission of the national regulator who can impose requirements as they see fit.
Third country equivalence
Solvency II includes a third country equivalence regime for (re)insurance. Solvency II equivalence is a judgement about a third country (non-EEA) prudential solvency regime. It applies to three areas:
– Reinsurance: where third country rules are considered equivalent reinsurers from those third countries must be treated in the same way by EEA supervisors as EEA reinsurers. This enables EEA insurers to enter into reinsurance contracts with third country reinsurers without local supervisory authorities demanding extra collateral is located locally.
– Group solvency: for an insurance group headquartered in the EEA with a subsidiary in a third country, the third country regime may be used to calculate the subsidiary’s solvency requirements. This does not permit cross-border accessfor the home company, and does not guarantee any right to establish local offices.
– Group supervision: for an insurance group headquartered in a third country with an EEA subsidiary, the EEA regulator may rely on group supervision exercised by the third country supervisor.
Gaining equivalence is partly a technical question of whether the home country’s regulation provides a standard of consumer protection equivalent to Solvency II, but the decision is also subject to potential objection by the Council and the Parliament.
Only Switzerland and Bermuda currently have full equivalence and the regime is new (since 1 Jan 2016) so it is hard to state precedents.
Solvency II also includes provisions which permit the EU to enter into an agreement with a third country. Article 175 allows the EU to enter into an agreement regarding the means of exercising supervision over third country (re)insurers conducting business in the EU, and EU reinsurers conducting business in that third country. This is a form of mutual recognition. Article 171 of Solvency II permits the EU to enter into an agreement with a third country regarding certain requirements applying to EU branches of that third country (re)insurer. Article 171 allows the EU to agree to the application of provisions which are different to those otherwise required under Solvency II for the purpose of ensuring, under conditions of reciprocity, adequate protection of policyholders.
The Insurance Mediation Directive
The Insurance Mediation Directive (to be replaced by the Insurance Distribution Directive) establishes some high-level principles for the conduct of insurance intermediaries. It requires that insurance brokers operating in the EU are registered and disclose certain information to consumers, though enables wide discretion onhow those requirements are implemented by national regulators. In practice, regulation varies between member states, from a registration requirement to detailed consumer protection rules (as in the UK). The directive specifically excludes commercial (business to business) activity from the strictest standards. The market access provisions also guarantee a right for brokers to sell cross-border or to establish local offices. To do this, they need only notify their home and host regulators. 2,758 UK insurance broking companies hold a passport to conduct business in the rest of the EEA and 5,727 insurance broking companies hold a passport to trade into the UK from the rest of the EEA.
Third country equivalence
For brokers, neither the Insurance Mediation Directive nor the Insurance Distribution Directive that will replace it, contain a third country equivalence regime.
Cross-sectoral European Regulation
Cross-sectoral European Regulation is also important to insurers. Data protection is relevant because insurers need to exchange personal data for underwriting. The mobility of workers is relevant because of access to talent and the significant contribution of foreign companies, particularly to the London Market. Industry views on these issues are set out below.
In terms of pensions regulation, the EU’s Institutions for Occupational Retirement Provision directive (known as IORP) establishes a governance and regulatory framework for pensions schemes. Specific rules are decided nationally, in the UK by DWP and The Pensions Regulator. A revised version of the directive is likely to come into force in October 2018, with a similar approach.
The right of pensioners of cross-border schemes to receive their pensions without discrimination is theoretically dependent on protections established in EU law16. In practice, many of the relevant matters are handled on a bilateral basis. For example, the UK has a set of arrangements for ‘qualifying recognised overseas pension schemes’ (QROPS)17.
Existing framework for how trade is facilitated between countries in this sector
The arrangements described in this section are examples of existing arrangements between countries. They should not be taken to represent the options being considered by the Government for the future economic relationship between the UK and the EU. The Government has been clear that it is seeking pragmatic and innovative solutions to issues related to the future deep and special partnership that we want with the EU.
On a global level, numerous WTO members make commitments in line with the WTO’s Understanding on Commitments in Financial Services18 allowing certain specialist products such as marine insurance, aviation insurance, goods in transitinsurance and reinsurance cover to be sold cross-border. However, several EU Member States have reservations in these sub-sectors19. Similar commitments (and reservations) are also contained in some bilateral and regional trade agreements. In certain countries, including some EU member states, these have been supplemented in practice by national exemption regimes, which permit further cross-border trade in limited circumstances, such as in relation to sophisticated counterparties.
The EU has also established bilateral agreements for non-life insurance with Switzerland and for certain types of (re)insurance with the US. The EU-US “Covered Agreement”, as it is called, is an example of an agreement entered into under Article 175 of Solvency II (mentioned above). Under specified conditions it eliminates local presence requirements, collateral requirements; enables group supervision to be conducted solely by the group home supervisor; and sets out mutual support for the exchange of information between supervisory authorities. The EU-Switzerland agreement on direct insurance other than life assurance21 broadly enables direct general insurers to establish a branch in EU member states, but does not give passporting rights across the EU as a whole.
More widely in financial services, there are well-developed principles at the international level which seek to support cross-border activity and avoid duplicative regulation and fragmentation.