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Preparing Your Captive for Brexit

Posted by Robert Geraghty 29 July 2016

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 licence. 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 licence to conduct insurance business in the UK. It 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. Alternatively, it could use a UK insurer to front the risk. 

If your captive is based in a European domicile writing business on a direct basis (such as Dublin, Malta, and Gibraltar), it may be affected indirectly by market volatility.

Next Steps

The current situation is unprecedented, as no member state has previously voted to leave the EU. However the following next steps are clear:

  • 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 those two years, 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. 

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

Advice to Captive Owners

In view of the current uncertainty, in the short term, you need to be prepared to review your captive risk profiles and insurance programmes and plan for the impact. You should also monitor markets closely to ensure that your captives can still meet solvency obligations and can fulfil obligations on non-Sterling liabilities.

The effects of Brexit on captive owners will become more apparent 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.

Robert Geraghty