Brexit is coming closer – what does this mean for small insurers where the “risk” is based in the EU?

Brexit is coming closer; it now looks likely that a deal will be reached on goods but not on services and that a transitional period will apply until 31st December 2020. If no deal is reached, the UK will cease to be a member of the single market from 29th March 2019.

If no deal is reached on services, UK-based insurers without branches in the EU will not be able to sell or service a policy where the “risk” is based in the EU. Bans on sales will not affect insurers whose market is purely within the UK, which includes most small insurers. However, servicing bans may be more problematic.

Servicing a policy includes collecting premiums and paying claims, as well as dealing with any queries. Therefore, without a deal, from the date of Brexit (or after the transitional period), UK insurers will no longer be able to collect premiums, pay claims or answer queries on policies where the risk is within the EU.

For life insurance, the risk is identified as the life assured. So, if a life assured has moved to an EU state, the policy can no longer be serviced. This includes people moving permanently to France, Spain or other EU countries and will include people from Northern Ireland moving to live across the border in Ireland.

Most smaller insurers and societies are likely to have a small (but relevant) group of policyholders who have retired to Spain or work in Northern Ireland but live in Eire. For these policyholders, you will no longer be able to service their policies from within the UK.

More worrying for some friendly societies are the Child Trust Fund policies written on EU nationals who have now returned to their original country – these are likely to be more numerous.

If you cannot pay a claim, do you effectively have to surrender the policy on the date of Brexit? Or does it cancel without value and you retain the proceeds until the policyholder returns to the UK? Do you make the policy paid up, leave it in force and then wait until the life assured moves back to the UK?

Larger insurers are, of course, dealing with this problem by establishing subsidiaries or branches in EU states (Ireland for example) and transferring all of the policies with an EU address into these subsidiaries or branches. The costs are significant requiring a Part VII transfer for an insurance company or a transfer under Friendly Society rules, as well as establishing a new insurer to receive the policies.

Of course, after Brexit, UK nationals are less likely to move to an EU country due to complex immigration processes, so there are unlikely to be significant additional problem cases. However, you will have to consider how you would deal with any such cases if they arose, even if you currently have no policyholders residing inside the EU.

We suggest that insurers start assessing the size of the problem and thinking about their options.