In the UK, AIG Europe Limited is one of the largest insurance companies specialising in the UK business insurance market. With offices throughout the country, AIG insures many of the UK’s top businesses, thousands of mid sized and smaller companies, as well as millions of individuals. Over the past 60 years, AIG has established an enviable reputation for developing innovative insurance products that keep in step with new trends and directions in business. Today, AIG has one of the widest product ranges in the market. youTalk-insurance sharing AIG insurance news and video.
Preparing for and navigating the challenges of Brexit
When asked what was most likely to throw a Government off track, the British Prime Minister, Harold Macmillan is famously said to have replied, ‘Events, dear boy, events.’ That quotation certainly seems to resonate when navigating the evolving path of Brexit negotiations in Europe. The political art of prediction based on rational analysis seems to have lost its power in the face of the twists and turns of events.
One important takeaway in the face of this level of unpredictability and change is that if events cannot be controlled or entirely predicted, then it’s crucial to conscientiously and comprehensively consider and prepare for a range of outcomes.
At AIG our first priority has always been to get ahead of Brexit to ensure that we promote and protect the needs of our policyholders through a smooth transition from the pre to post Brexit world. We started planning for the potential outcome of Brexit back in November 2015, and this planning accelerated after the referendum vote in June 2016.
As has been well documented, one of the principal consequences of Brexit for insurers operating out of the UK is diminished access to the EU single market. AIG prepared from the outset on the basis that the UK financial services market could lose freedom of services and establishment or ‘passporting,’ which allows firms to operate unimpeded across the EU. So, like many other insurance firms, this has meant revisiting our corporate structure to ensure that AIG in Europe still has access to the European Economic Area (EEA) post-Brexit.
We were an early mover when we announced on March 8, 2017 that we would be locating a new insurance entity in Luxembourg to serve the needs of our EEA and Swiss policyholders post-Brexit, and we are on track to be one of a few major carriers to be ‘Brexit proof’ this year. The feedback from our clients and brokers has been extremely positive as concerns grow over the certainty offered by insurance policies being issued today. We chose Luxembourg for a range of factors, not least because Luxembourg is close to our clients at the heart of Europe, with excellent capability in financial services – about half the workforce is engaged in the industry – and with an experienced and well-respected insurance regulator.
As well as acting promptly, AIG has also acted comprehensively by transferring AIG’s back book of existing and historical policies covering EEA and Swiss risk to the new Luxembourg company, instead of expecting the regulators and the negotiating team to ‘solve for’ contract continuity issues.
Given the level of uncertainty in the context of complex and challenging negotiations, it seems sensible to take a comprehensive approach to provide early clarity to our clients. AIG’s Luxembourg operations will be ready for business from December 1, 2018, ensuring that we can continue to serve policyholders seamlessly across Europe and globally.
The British Prime Minister, Theresa May, published the UK Government’s White Paper on the future relationship earlier this month indicating that the UK negotiating position on financial services is now focused on updating the existing third country equivalence regime through the concept of ‘expanded equivalence’.
The scope of the existing equivalence regime varies from sector to sector, depending on the relevant EU Directive. For insurance, Solvency II outlines the equivalence framework based on:
- Reinsurance equivalence – allowing EU-UK reinsurers to reinsure business from UK-EU cedants as if locally authorized, i.e., no penalties such as capital surcharges and collateral requirements.
- Group supervision equivalence – allowing recognition of supervision of insurance groups in each other’s country and not overlaying the host group regime where there is a local insurance or reinsurance subsidiary.
- Solo solvency – allowing equivalent (re)insurers to be brought into the group solvency calculation as determined by the home state supervisor.
The concept of ‘expanded equivalence’ is likely to be the subject of debate and negotiation. There is the potential for more regular ongoing review of equivalence decisions to manage potential divergence given the size and inter-related nature of the UK and EU in the context of financial services. The 30-day notice period under which equivalence decisions can be unilaterally withdrawn by the EU is also likely to be an area of discussion. The UK Government has not yet spelled out in detail what ‘expanded equivalence’ means from their perspective, although they have highlighted that there are some areas of the financial services sector with no equivalence regime at all in the framework EU legislation.
Whatever the UK/EU framework, closer regulatory relationships amongst EU, UK and US regulators are becoming more important than ever. Post-Brexit, the nature of the financial services debate with the EU will continue to evolve for the US as well as for the UK.
How will regulatory cooperation between the EU and the UK work in a post-Brexit world, and what complexity does this add for the US on key areas such as International Capital Standards? Will there be any prospect for a US/UK Covered Agreement? What will the priorities for financial services legislation be for the EU 27 and how will continued supervisory convergence (for example through additional powers to the European Supervisory Authorities through the ESA review) influence regulatory coherence and supervisory practices?
At AIG, our view is that close regulatory cooperation and collaboration is in the best interests of all parties, including the UK, EU and US, while recognizing the importance of respecting national sovereignty.
The more cooperation on the approach the better, so that if there is divergence, it is divergence with a purpose. We also think it could be valuable for the US and the UK to pursue a US/UK version of the Covered Agreement. Given the importance of these markets to US and UK based insurers and their customers, it is in the interest of both the US and UK to maintain the benefits of the agreement.
At AIG, our take away on Brexit has been the same from the start – hope and advocate for the best, prepare for the worst (including No Deal and the UK falling back on WTO rules) - and explore every avenue to turn Brexit into an opportunity.
Authored by Thomas Leonardi, EVP, Government Affairs, Public Policy & Communications at AIG
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