UK insurers that have customers in Germany will be pleased to hear that the German legislator has passed a measure that allows the financial supervisor – Bundesanstalt für Finanzdienstleistungsaufsicht (BaFin) – to adopt a temporary order that will allow insurers to continue to honour contracts in the country in the event of a no-deal Brexit.
Based on the legislation, if BaFin actually issues the temporary order then UK insurers will be able to perform and wind-up contracts in force when the UK leaves the European Union.
The measure is designed to ensure that German policyholders do not find that their claims are not paid after the UK leaves the EU in what increasingly looks like a ‘hard’ Brexit with no deal agreed. However, the order expressly does not apply to new business.
German market experts agree that those UK and international insurers and reinsurers that are based in the UK and wish to continue underwriting new business in the huge German market still need to look for a suitable base in the country.
Reiner Gleiss, consultant to the City of Cologne (Stadt Koeln) and Cologne Chamber of Commerce and Industry (IHK) said that, if BaFin issues the order, this should not allow UK-based insurers to be lulled into a false sense of security over their strategic position in Germany post-Brexit.
He urged them to look closely at what the City of Cologne has to offer for those insurers keen to continue doing business in Europe’s biggest insurance market.
“The news from the new German Brexit legislation is positive because it shows that, while the politicians in London and Brussels currently seem unable to reach a solution to the Brexit question, local legislators and financial regulators, under guidance from the European Insurance and Occupational Pensions Authority (EIOPA), have moved to protect the interests of customers through the temporary extension of passporting rights to ensure that claims will still be paid on existing contracts,” said Mr Gleiss.
“This does not, however, apply to new business and so any insurer or reinsurer that wants to continue writing German, or any other European business will still need to create a fully regulated branch operation in the European Union. Cologne is the obvious choice because it has a long and rich tradition of insurance and reinsurance with over 70 international insurers already based here. This is a vibrant market with direct access to the huge regional economy of North Rhein Westphalia and is also the heart of innovation as the city was recently granted the license to create InsurLab, the heart of Germany’s Insurtech business,” added Mr Gleiss.
Local legal experts agreed with Mr Gleiss that the news should not be taken as an indefinite extension of current conditions for UK-based insurers and reinsurers.
Frank Puettgen, Insurance Counsel with leading international law firm CMS based in Cologne, said that the new German rule was positive for existing policyholders.
If a ‘hard’ Brexit occurs and BaFin issues the order, contracts will be honoured and those firms that do not want to continue writing new business in Germany have time to wind down their business at least through portfolio transfers to carriers registered in Germany and authorized by BaFin.
But, the CMS lawyer said that any UK firms keen to continue doing business in Germany post Brexit that do not already have an EU branch operation will need to come up with a credible plan.
Mr Puettgen pointed out that most of the leading international insurers and reinsurers currently based in London have already chosen their domiciles within the EU – most commonly Luxemburg, Brussels or Dublin. But, he added there are still some carriers that have not acted and so should take a look at what Cologne has to offer.
The expert lawyer also said that he believes that there is still considerable potential for growth in the existing Cologne market on the back of Brexit even if this does not represent a flood of relocations from London to the German city.
UK-based insurers that already have operations in Cologne and elsewhere in Germany will inevitably seek to expand their staff and expertise locally on the ground post Brexit.
Also, there is another simpler and faster option available to carriers that have not already set up EU branches: The creation of new intermediaries or Managing General Agencies (MGAs) that can be authorised by the Chamber of Commerce and Industry and not the BaFin.
“In the past the international insurers and reinsurers would have their technical staff – underwriters, risk managers, claims people all in London. We are now moving to a more federalised system whereby insurers will need in particular technical staff in Luxemburg, Brussels and the like to show that they are not simply shell companies. But, I believe you will see the growth or intermediary companies in the markets where the business lies such as Cologne. The market facing experts who attract and underwrite the business and manage claims will need to be in Cologne, Frankfurt or wherever the business is based, not in Luxemburg,” he explained.
Evidence suggests that this could well be the case. In December of last year, for example, Liberty Specialty Markets, part of Liberty Mutual Insurance Group, announced that it had secured a license for its European insurance company Liberty Mutual Insurance Europe SE (LMIE) to operate from Luxembourg to enable it to continue conducting insurance and reinsurance business in Europe post-Brexit.
But the business in Germany will not be generated and underwritten in Luxemburg. Liberty Specialty Markets already has two operations in Germany in Cologne and in Hamburg. The Cologne operation has 30 senior underwriting and claims staff and is growing.
In January Liberty Mutual Re announced, for example, that it had appointed Uwe Haug as Head of Underwriting Strategy and Business Development for its global financial risks reinsurance business. Mr Haug is based in Cologne and has full underwriting authority in addition to his strategic responsibilities.
Law firm Clyde & Co, explained that under German insurance contract law, Brexit will not automatically cause insurance contracts to be void because the lack of a license, by itself, does not impact the effectiveness of a contract.
The law firm added, however, that the prevalent opinion in German insurance supervisory law is broadly in line with EIOPA and requires insurers to make use of any termination rights to wind up existing business. It said that there are several opinions that also doubt the possibility to fulfil contracts where such a termination is not possible thus creating “considerable uncertainty”.
As a result of this uncertainty, the German legislator has unilaterally adopted an enabling provision allowing BaFin to order an extension of passporting rights for UK insurers for up to 21 months to allow an orderly wind-up. The period is identical with the transition period that is foreseen under the Withdrawal Agreement, explained Clyde.
But, as Mr Puettgen of CMS pointed out, Clyde & Co also stressed that underwriting of new business is “explicitly excluded” and insurers that do wish to continue underwriting new business will be required to obtain a new authorisation, or transfer the business to a licensed risk carrier.
Clyde explained that, in the course of the legislative procedure, it had been suggested to leave the duration of the extension to the discretion of BaFin, even beyond 21 months, to account for complex long-term insurance contracts where a timely wind-up might not be possible. The law firm said, however, that this proposal was ultimately rejected adding that it remains to be seen whether BaFin will make use of the full 21 months when extending passporting rights at all.
Henning Schaloske, Partner at Clyde & Co in Dusseldorf, commented: “This is a welcome move by the German legislator to remove some of the uncertainty for both insurers and policyholders in the event of a no-deal Brexit, which is increasingly being seen as a very real possibility. The extension of passporting rights for up to 21 months post-Brexit is a significant development and should provide sufficient time for the resolution of outstanding contracts but it is important that regulators across the EU continue to work together in a spirit of cooperation to address issues relating to cross-border insurance.”
Michael Josipovic, Managing Director of the Cologne Economic Development Corporation, sees the legislative initiative as good news for Cologne as an insurance centre. “Since the referendum, Cologne has closely followed developments in connection with Britain’s future position on the EU,” he said.
“The insurance and finance industries are particularly affected by Brexit – on both sides of the channel. Together with the Chamber of Industry and Commerce, the city has supported the exchange of information between the Cologne insurance industry and British industry representatives from the very beginning and has promoted Cologne as an insurance centre,” continued Mr Josipovic.
The Cologne Chamber of Commerce and Industry also welcomes the planned transitional regulation. “We are using the time to continue our dialogue with the British business community,” said Alexander Hoeckle, Managing Director International and Corporate Development of the Cologne Chamber of Commerce and Industry. “Together with NRW.Invest, we will be back in London on March 11. The Expert Forum of the OMFIF, Official Monetary and Financial Institutions Forum, will focus on the impact of Brexit on the financial and insurance industry in Germany and Great Britain.”