How Brexit Could Affect Captive Insurance Companies

Among the many questions following the UK vote to exit the European Union (EU) is how Brexit will affect owners of captive insurance companies. Although the details of the UK’s departure have yet to be established, Brexit could have a direct impact on captives’ “passporting” rights and on their financials.

“Passporting” refers to the right of UK resident insurers, captives in the UK and Gibraltar, and UK brokers to provide insurance services in EU member states from a single country license. Since the UK will no longer be part of the EU, that right may be restricted.

Similarly, an EU resident captive insurer may need an additional license to conduct insurance business in the UK. The EU captive insurer may need to form a UK branch or a new UK entity, particularly if it is insuring compulsory classes such as employers’ liability and third-party motor liability risks in the UK.  Another alternative would be to use a UK insurer to front the risk.  For non-compulsory classes of risks, the EU resident captive could cover the UK risks on a non-admitted basis without applying for a separate license.

Fallout From Investment Market Volatility

Owners with captives based in the European domiciles writing business on a direct basis such as Dublin, Malta, and Gibraltar may also be affected indirectly by volatility in exchange rates and investment markets following the referendum. Owners should monitor markets closely to ensure that their captives can still meet solvency obligations and can fulfill obligations on non-Sterling liabilities.

Credit ratings for (re)insurers should also be closely monitored for potential downgrades and knock-on effects of the captive’s Solvency Capital Requirement under Solvency II. A.M. Best has announced that it does not expect to take rating actions in the near term as a direct consequence of Brexit.

Next Steps

Although the referendum result was in favor of the UK to leave the EU, there is uncertainty around the process and timing of the UK’s official exit. Once the UK government formally notifies the European Council of its decision, it will trigger Article 50 of the Lisbon Treaty, starting the transition, which is expected to last at least two years.  During that time, the UK and EU will negotiate the terms of the exit and determine the UK’s future relationship with the EU.  Any extension of the transition period will have to be agreed to by all remaining EU member states.  The current situation is unprecedented, however, as no member state has previously voted to leave the EU.

Captives resident in the EU can continue to do business as usual until the final decisions and agreements have been made between the UK and the EU member states.  In the interim period, captives could be used to write other classes of insurable risks that the multinational group faces as a result of the referendum result, such as financial loss following the investment and foreign exchange downturn, supply chain issues, etc.

Advice to Captive Owners

In view of the uncertainty around the terms of the UK’s exit as well as the timeline and how it will affect collaboration among EU member states, we advise clients in the short term to be prepared to review their captive risk profiles and insurance programs and to be aware of and plan for the impact.

The effects of Brexit on captive owners will become more apparent in the months to come, once negotiations start and the terms of the UK’s relationship with the EU becomes clearer. However, the transitional timeline of two years will allow for proper planning and management of the situation for affected captive owners. Marsh Captive Solutions will be monitoring the situation and will continue to provide updates as the details unfold.