Commercial insurers are most vulnerable to passporting risk
The passport for financial services in the EU consists of two freedoms: freedom of services and freedom of establishment.
The freedom of services is important to insurers that conduct cross-border business with the EU from the UK. Meanwhile the freedom of establishment is important to UK-based insurers with substantial branch networks in Europe as it enables insurers to hold all their capital in one location as opposed to capitalising each local branch.
UK life insurers do not conduct as much cross-border basis as commercial insurers do. Furthermore, the UK’s largest life insurers tend to have independently capitalized European subsidiaries. Therefore, if the UK does lose passporting rights they will not need to make significant changes to the geographical distribution of capital within their business.
Equivalence could limit the damage for many insurers
A measure that could reduce the disruption for insurers would be achieving third party equivalence with the Solvency II regime. Equivalence spans reinsurance, solvency calculation and group supervision and reduces the regulatory burden for companies conducting business in the EU from the ‘third country.’
It must be noted that equivalence does not give financial services firms the same depth of access to the single market that the UK currently enjoys. Furthermore, despite the UK having exactly the same regulations as the EU upon exit, the granting of equivalence is still completely at the discretion of the European Commission (EC) and it can take up to a year for equivalence to be granted.
Another problem that firms may have even if the UK achieves full equivalence, is it does not bind the UK to copy changes in EU law. Therefore, if in the future EU regulation changed in a way which the UK did not agree with it could choose not to implement the change and consequently could lose equivalence. The lack of absolute certainty regarding future equivalence could push insurers to relocate operations to EEA countries.
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