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23 March 2021
Following the end of the Brexit transition period on 31 December 2020, the passporting rights that UK and EEA insurers had under Article 15(1) of the EU Solvency II Directive (2009/138/EC) in respect of their UK business ended. On 13 January 2021 the Federal Financial Supervisory Authority (BaFin) issued a general administrative act regulating the conduct and run-off of cross-border business of insurers in the United Kingdom, Northern Ireland or Gibraltar.(1) Similarly, the United Kingdom enacted the financial services contracts regime (FSCR)(2) to ensure that EEA firms which not have entered the temporary permissions regime (TPR)(3) are able to wind down UK-regulated activities in an orderly manner. What does this mean for insurers based in the United Kingdom, Northern Ireland or Gibraltar in respect of their cross-border activities in Germany and for German insurers in respect of their cross-border activities in the United Kingdom?
In accordance with the Insurance Supervisory Act, BaFin issued a general administrative act regulating the conduct and run-off of cross-border activities of insurers domiciled in the United Kingdom, Northern Ireland and Gibraltar. The act stipulates that if underwriters have written business exercising the passporting rights in line with the EU Solvency II Directive, they may run-off of this business in accordance with contractual agreements already existing by the end of the transition period on 31 December 2020. However, insurers must terminate such contracts as soon as legally possible (ie, without undue delay). Up until to this point, insurers can run off the contract without needing a licence.
Insurers continuing business in accordance with the act must provide BaFin with the documents and information stipulated in the order (Section 4 of the act).(4)
Apart from the requirements in Section 4 of the act, the financial and market conduct supervision continues in accordance with the earlier memorandum of understanding concluded on 15 April 2019 between BaFin and the UK Prudential Regulation Authority.(5) Consequently, Articles 27 and 30 of the EU Solvency II Directive have been kept.
The act(6) also contains a rule regulating the transfer of insurance contracts initiated before midnight on 31 December 2020. This situation is regulated in accordance with the EU Solvency II Directive rules(7) (particularly Article 30).
The FSCR permits insurers to carry out regulated activities which are necessary to perform contracts that were already existing by the end of the transition period ending on 31 December 2020 without the need to apply for extra permission to do so.(8) In a way, the rules are comparable to BaFin's act. However, the FSCR further distinguishes between two regimes:
The CRO applies to firms without a UK branch, which did not hold a top-up permission and did not enter the TPR, and the SRO applies in situations where this is not the case. Accordingly, insurers that were operating under the passporting rights of the EU Solvency II Directive fall within the CRO regime. However, contrary to BaFin's act, this regime does not require insurers to terminate contracts covered as soon as legally possible.
Both BaFin's act and the United Kingdom's FSCR seek to prevent requirements for permissions to run off contracts that were already existing by the end of the transition period. Further, both seek to avoid the requirement for insurers to ask for contractual adaptions due to the change of the supervisory regimes. However, whereas BaFin's act requires that contracts that are continued in accordance with the act are terminated at the earliest possible time, the FSCR contains no similar provision.
The requirement under BaFin's act to end pre-existing contracts does not mean that insurers must offer assureds a cancellation of the contract before the agreed expiry date, unless otherwise agreed in the insurance contract or applicable in law. However, if a cancellation option is agreed, insurers must terminate the contract pursuant to BaFin's act. Accordingly, if a clause with the following content is agreed, the "may" in the clause becomes a "must" and the UK, Northern Ireland or Gibraltar insurer must give notice of cancellation in writing without undue delay pursuant to BaFin's act if they have not initiated the transfer of the insurance contract before midnight on 31 December 2020 in accordance with BaFin's act:
This policy may be cancelled by notice in writing. The insurer may give notice at any time. The insurers shall give note 30 days of such other notice if of longer duration as mandatory regulated by the laws stated in the policy scheduled.
For further information on this topic please contact Maximilian Guth or Esther Mallach at Arnecke Sibeth Dabelstein by telephone (+49 40 31 779 70) or email (email@example.com or firstname.lastname@example.org). The Arnecke Sibeth Dabelstein website can be accessed at www.asd-law.com.
(1) Further information is available here.
(2) Further information is available here.
(3) Further information is available here.
(4) Further information is available here.
(5) Further information is available here.
(8) Further information is available here.
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