Writing insurance business into the UKMarch 17, 2020
This is the fourth issue of Strictly Risk, our series of boardroom briefings taking you behind-the-scenes of the insurance industry and highlighting the risk management and insurance techniques that businesses use to protect and strengthen their balance sheet. In previous issues, we looked at how to appoint the right insurance broker for your business, how to avoid insurance pitfalls in commercial transactions, and how to take a more strategic approach to cyber risk. In this issue, we consider the regulatory factors that non-UK domiciled insurance entities should consider before writing insurance business into the UK.
The UK insurance market is the fourth largest in the world, and the largest in Europe, so it is easy to see why insurance entities are keen to trade in the UK marketplace.
To date, insurance entities regulated in an EEA territory have been able to take advantage of passporting rights as a means of writing insurance business into the UK, avoiding the need to obtain UK regulatory authorisation. However, as Brexit Day hardens into Exit Day on 31 December 2020, all non-UK domiciled insurance entities will need to decide whether and how to continue writing insurance business into the UK. Whilst the temporary permissions regime may provide some limited assistance (and it is always possible that a new system of passporting may emerge from the UK-EU governmental negotiations) non-UK domiciled insurance entities should prepare themselves for joining the UK regulatory authorisation regime.
The consequences of non-compliance are serious and so this is a time for clear thinking and careful planning.
If you are managing or advising a non-UK domiciled insurance entity that intends to continue writing insurance business into the UK via the UK regulatory regime, here are FIVE QUESTIONS you should be asking yourself.
QUESTION ONE – WILL YOUR INSURANCE ACTIVITY BE CARRIED ON ‘BY WAY OF BUSINESS’?
For insurance activity to be ‘regulated activity’ it must be carried on ‘by way of business’. In most cases, this will be obvious, but it is not always. The Financial Conduct Authority’s view as to whether an activity falls within the ‘by way of business’ test is that it is a matter of judgment, taking account of factors such as the degree of continuity of the activity, the scale of the activity, the commercial nature of the activity and the amount of the activity relative to the entity’s other non-regulated activity.
QUESTION TWO – WILL YOUR INSURANCE ACTIVITY INVOLVE CONTRACTS OF INSURANCE?
Effecting contracts of insurance and carrying out contracts of insurance are two separate regulated activities, both of which require separate authorisation. Both activities are multifaceted, so take time to consider your entity’s role in the insurance supply chain and analyse the functions that you and your agents will perform. Also decide whether you will be writing life or non-life business, as Solvency II prevents new insurance undertakings from being authorised as composite insurers.
QUESTION THREE – WHERE WILL YOUR INSURANCE ACTIVITY TAKE PLACE?
As it is only regulated activity carried on in the UK that falls within the ambit of UK regulation, determining where the insurance activity is taking place is a key issue to determine. The answer is not always straightforward. Even though the functions that your entity performs in relation to an insurance contract are not in the UK, this does not necessarily mean the regulated activity is not being carried on the UK. This is complicated still further where your entity is acting through agents operating in the UK. What is required is a detailed analysis of the roles and functions of all the participants in the insurance contract from the risk carrier to the insured in order to determine the location of the insurance activity and whether or not it is subject to UK regulation.
QUESTION FOUR – WILL YOUR INSURANCE ACTIVITY BE CARRIED ON AS PRINCIPAL?
When it comes to effecting and carrying out contracts of insurance in the UK, only those acting as principal will require UK authorisation. This means your authorised agents, such as insurance brokers, underwriting agents, third party claims handlers or loss adjusters will only need to be authorised to perform their own insurance functions, such as the insurance distribution activities they may carry out for you.
QUESTION FIVE – WILL YOUR INSURANCE ACTIVITY FALL WITHIN ANY EXCLUSION OF EXEMPTION?
There are certain exclusions and exemptions that can apply to insurance activity, avoiding the need to be authorised, but these are very limited. That said, a careful analysis of each exclusion and each exemption is highly recommended to see if any of them applies or if, more likely, your insurance activity can be re-configured to take it outside the scope of UK regulation.
We would say this wouldn’t we but, given the serious consequences of non-compliance for both insurance providers and insurance policyholders, we would always recommend you seek the advice of lawyers who specialise in UK insurance regulation who will be able to guide you in answering these five important questions.