Brexit contingency planning: a dot in the horizon post Covid-19?

Brexit was the most serious threat the Gibraltar financial services industry had ever faced. The 2016 U.K. Brexit referendum result cast a shadow over the sector, and even the  immediate prospects for my own professional practice looked challenging, years after building a hugely successful business model. In 2016 I therefore set out to devise a business strategy which has since received wide publicity, including the two-way business exchange between Malta and Gibraltar (later extended to include La Linea). As I have watched the events of the last 4 months unfold, Brexit does now seem like a distant dot in the horizon. But whereas Brexit didn’t immediately impact consumers and the very large majority of people (outside the financial sector) got on with their lives without any concern whatsoever, the Coronavirus has hit everyone and indeed hit every business activity. There is also no escaping that the tourist, leisure, retail and hospitality sectors are and will be particularly hard hit. The Brexit issue I highlight in this article, whilst still therefore important, may be seen as paling into insignificance in comparison. 

As a consequence of the UK’s decision (which also includes Gibraltar) to leave the European Union (commonly known as “Brexit”), a likely scenario (known as a “Hard Brexit”) was (and still 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 (after the 31 December 2020). These rights under European Union law are known as “passporting rights”, which currently permit insurance companies to issue and administer insurance policies sold in EU countries without the need for separate authorisation and capitalisation in each EU territory.

There has therefore been obvious concerns that following a ‘no-deal Brexit’, UK and Gibraltar insurers will not be able to continue to service policyholders and claimants across Europe in line with applicable regulatory rules (often referred to as “contract continuity”). As a result I have been assisting a number of Gibraltar insurance companies over the past three years with Brexit contingency planning and implementation, principally, portfolio transfers and redomiciliation.

A portfolio transfer of EU insurance liabilities to an EU insurer is the most obvious option available. 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 new EU insurer (as transferee). Without implementation of a portfolio transfer (especially in the case of life insurance companies) it could be very many years before the last claim is paid in full and instead companies will be dependent on EU Member States allowing suitable transitional (or grandfathering) periods within which to continue to receive premiums from and pay claims to EU policyholders after 31 December 2020.

Portfolio transfers, however, are expensive to execute. There are legal, regulatory, actuarial and other business costs associated with the process, such as newspaper advertising and publicity requirements. This can also 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 directions and the sanction from the court. (Gibraltar portfolio transfers of life business require court sanction, whereas for general insurance business the local authority that most provide approval is the financial regulator).

In some cases it may be unnecessary to complete a transfer (even if the process had already commenced) given the length of time that has transpired since the original U.K. Brexit date was first set (and subsequently extended), if there are no outstanding claims liabilities remaining. In other cases the parties might not obtain all the necessary approvals to complete the transaction. In others still, the transfer of the book of business would require assets and reserves supporting those insurance liabilities to move across and the transaction might not find a willing buyer or the parties might not be able to agree commercial terms.

I have appeared in four Gibraltar court hearings on behalf of applicants over the last 15 months where I have articulated (in open court) this complex but hugely interesting issue. As I have pointed out, the concerns about contract continuity arise notwithstanding that insurance companies that sold policies were authorised at the time to sell these policies under the EU passport, and that they would, of course, continue to be licensed by their home regulator (Gibraltar) under local law to carry on insurance business if the transfer did not take place.

The European regulatory body (European Insurance and Occupational Pensions Authority) issued on 19 February 2019 a number of recommendations to EEA regulators. One of these recommendations is that national competent authorities should allow an orderly run-off of business which become unauthorised in a ‘no-deal Brexit’. 

Of course, for such run-off to be an adequate solution to the Brexit uncertainty it would have to cover the full policy period to expiry (which could be many years in the case of a life assurance policy). This has not yet happened and so far the run-off periods announced by EEA regulators are for a relatively short duration. The transition periods published range from 9 to 24 months. 

The question on the 31 December 2020 (the end of the transition period) will therefore be, what happens now? UK and Gibraltar insurers who have not been able to commence or complete a portfolio transfer will obviously be hoping for longer extensions to the already announced transitional periods. 

A solution has to be provided at an EU level otherwise it will place those companies with legacy run-off books they have not been able to transfer to EEA insurers (for no fault of theirs) in an impossible position. Indeed, unless the EU applies proportionality to allow an orderly run-off of existing insurance liabilities so that post-Brexit insurance claims can continue to be paid in full, how else could existing claims be paid and insurers continue to service existing claimants if they are advised that an insurance claim cannot lawfully be paid? 

Whilst this is unchartered territory, I believe the Gibraltar Courts are likely to be sympathetic to companies in these circumstances with whatever options, they are advised, are available to them. 

Postscript: I wrote this as I walked to Europa Point in Gibraltar on Sunday morning where I took the photo I am using for the article. Readers will see the North African coast and a ship (barely visible) in the horizon. In around April 711 if I had stood in this same place I may well have seen a similar view, but this time a ship in the distance commanded by the Berber general Tarik (who subsequently lent his name to Gibraltar - ‘mountain of Tarik’). Little could I have known back then that things were going to change spectacularly in less than 3 years.

I wonder whether the same could even be true now. The post-pandemic new world order is significantly more challenging than anything faced with Brexit for the reasons I stated at the beginning of this article. Most retail and hospitality businesses in particular will now be asking what else they can do beyond the cost cuts they have already announced because consumer confidence (spending) is not going to return to the pre-Coronavirus level until probably summer 2021, at the earliest. But if the recession that unfolds is as deep as what is being predicted, we will see the highest rates of unemployment and insolvencies in living memory. I also see a challenge to, and questioning of, the status quo in every respect in the future, as people (and indeed populations generally) hit by this economic uncertainty in the horizon, become less tolerant and more challenging than they would otherwise have been. 

Nigel Feetham QC