Following the end of the EU-UK transition period and the UK’s full withdrawal from the EU on December 31, 2020, (re-)insurance undertakings domiciled in the UK or Gibraltar have lost their European passporting rights that they previously had under Article 15(1) of Directive 2009/138/EC¹ (Solvency II). Equally, those pension funds that were, under EU rules categorized as institutions for occupational retirement provision (IORPs), domiciled in the UK or Gibraltar, have lost rights under Articles 11 and 12 of Directive (EU) 2016/2341² (IORPs II Directive), notably those that previously allowed IORPs to operate on a cross-border basis without an establishment in a given EU Member State. 

The German Federal Financial Supervisory Authority (Bundesanstalt für Finanzdienstleistungsaufsicht (BaFin) has recently published a “General Ruling” ("Allgemeinverfügung") that imposes binding general rules on UK insurers (Post-Brexit Access Ruling)³. Contrary to a BaFin Circular that indicates how BaFin will tackle certain circumstances in its future regulatory practice, a BaFin General Ruling is a binding administrative act imposing legally binding instructions on those firms subject to BaFin’s supervision.

In summary, the Post-Brexit Access Ruling permits those (re-)insurance firms and IORPs that fall within its scope to continue to wind down and run off their German business without the need for an additional license from BaFin, provided those firms comply with certain ongoing reporting requirements. The Post-Brexit Access Ruling is not limited in its territorial application. As a result, it applies to all UK (re-)insurers and IORPS that still have contractual relations after December 31, 2020, with clients domiciled or ordinarily resident in Germany. 

This Client Alert builds upon our December 2020 Client Alert⁴ discussing the key considerations for all financial services providers in light of the Post-Brexit EU-UK Trade and Cooperation Agreement (the TCA) and focuses on the impact of BaFin’s Post-Brexit Access Ruling for (re-)insurers and IORPs still operating from the UK or Gibraltar into Germany. This Client Alert should also be read in conjunction with our January 2021 Client Alert assessing ESMA’s reminder on reverse solicitation principles.⁵

Why now? 

The TCA did not introduce a framework to assist UK or Gibraltar-based (re-)insurers or IORPs with the loss of EU passporting rights. Many affected firms had already taken preparatory measures, especially by transferring portfolios with EU-27/EEA domiciled policyholders to appropriately established and licensed EU-27/EEA vehicles within that firm’s group. Where firms have not transferred such EU-27/EEA business to an appropriately permissioned vehicle in their existing group, such firms may have transferred such business to third-party insurers that do have vehicles that are appropriately permissioned to transact with EU-27/EEA policyholders under Solvency II and/or the IORPs II Directive. 

These moves occurred as a result of the Brexit uncertainty leading up to the TCA. While the EU and the UK have indicated that they would work towards a further agreement for financial services cooperation (and possibly access) by March 2021, much uncertainty remains over whether the EU and the UK will conclude such a future financial services agreement and how insurers may benefit from it. Given the gap in what the UK and the EU-27 agreed to date in the TCA, BaFin published its Post-Brexit Access Ruling on December 31, 2020, to provide for some further certainty and guidance and ultimately to protect policyholders affected by this gap. 

General scope and technical background of the Post-Brexit Circular

The Post-Brexit Access Ruling took effect as of January 1, 2021, and applies to those affected (re-)insurance companies and IORPs until the complete termination of their existing contracts with those existing policyholders domiciled or ordinarily resident in Germany. Under the Post-Brexit Access Ruling, BaFin has announced the extent to which it will use its power granted under section 294(7) of the German Insurance Supervision Act (Versicherungsaufsichtsgesetz - VAG) to supervise the winding-down/run-off of existing contracts. 

Pursuant to section 296 (1) VAG, the Post-Brexit Access Ruling applies the provisions of the VAG in such a way that BaFin may waive compliance with certain provisions of the VAG in whole or in part, as long as the protection of policyholders, insured persons, third parties and beneficiaries of insurers or IORPs is ensured. At present, BaFin is of the view that the legal framework for the supervision of insurance companies operating from the UK and Gibraltar, as set out in the VAG for EU-27 insurers, ensures sufficient financial and legal supervision. For this reason, the Post-Brexit Access Ruling states that insurance undertakings and IORPs domiciled in the UK and Gibraltar, which have conducted cross-border business in Germany prior to December 31, 2020, will not require permission from BaFin pursuant to section 67 (1) VAG when completing the winding-down/run-off of existing contracts with existing policyholders in Germany.

The BaFin’s Post-Brexit Access Ruling is also complemented by a memorandum of understanding between the UK's Prudential Regulation Authority (PRA) and BaFin. The practical outcome of the MoU is that supervision of (re-)insurance firms and IORPs will continue to be based on Article 30 Solvency II post-Brexit. In short, the sharing of supervisory responsibilities between BaFin and the PRA in respect of (re-)insurers and IORPs that are caught under the BaFin’s Post-Brexit Access Ruling will continue. 

Importantly, should BaFin or the European Insurance and Occupational Pensions Authority (EIOPA) conclude that the supervisory standards in the UK and Gibraltar no longer ensure adequate protection of policyholders, the MoU may be terminated upon notice. In case the MoU is terminated, BaFin expressly reserves the right to revert to full supervision of third-country insurance undertakings for the remaining wind-down/run-off period. In a scenario in which the BaFin reverts to a strict interpretation of the VAG, it would treat UK (re-)insurers/IORPs as "ordinary" third-country firms, i.e. UK insurers would have to apply for a German license pursuant to section 67 VAG and maintain regulatory capital through assets allocated with what will be an incoming third-country branch that would need to be domiciled in Germany or through an appropriately established and licensed subsidiary located in Germany or in another Member State of the EU-27/EEA that in turn can “passport” its license into Germany. Firms that are caught by and which need to comply with the provisions of BaFin’s Post-Brexit Access Ruling need to observe certain conduct of business and regulatory reporting requirements. 

Existing contracts with German policyholders

Termination versus long(er)-term wind-down/run-off

In general, the Post-Brexit Access Ruling requires (re-)insurance companies and IORPs to wind down / run off existing contracts in accordance with their terms, i.e. to terminate their contracts to the extent that this is legally possible. Because of the high level of consumer protection that German insurance contract law provides for, UK (re-)insurers/IORPs may indeed face a number of restrictions when trying to terminate policies with existing German clients. If termination is not possible under applicable contractual or civil law principles, any arrangements between relevant firms caught by the Post-Brexit Access Ruling and their existing German clients will remain subject to BaFin’s supervision. This approach is sensible and pragmatic as otherwise such firms would inevitably either commit a breach of contract law by terminating the contracts with their clients without cause, or would conduct insurance business in Germany without the license required by section 67 (1) VAG.

Consequently, the Post-Brexit Access Ruling aims to avoid inadvertent violations of the VAG on the one hand and to safeguard the interest of policyholders, insured persons and third parties on the other hand. 

Timeframes

It should be noted that the Post-Brexit Access Ruling does not impose any limits regarding the timeframe during which (re-)insurance undertakings and IORPs must terminate their existing contracts with German clients. The fact that there are no time limits and the BaFin does not challenge the legal status of existing contracts, until transferred or naturally terminated, is good news for long-term business, e.g. life insurance contracts and pension schemes.

Regarding IORPs, a full application of VAG license requirements would not only have led to a change in the supervisory regime, but also to a need to monitor compliance with all German employment and pension law requirements, something which would have imposed significant compliance challenges for certain firms. 

General Good Requirements

Even prior to Brexit and the expiry of the EU-UK transition period, UK and Gibraltar firms that had made use of passporting under the Solvency II and/or IORPs II Directive regimes had to comply with certain German "General Good Requirements"⁶ that applied to-EU cross-border business⁷. Following the withdrawal of the United Kingdom and Gibraltar from the EU and the EEA, UK (re-)insurers and IORPS now have to comply with all the requirements of German law, not only with those classifying as General Good Requirements.

Reporting requirements

BaFin’s Post-Brexit Access Ruling requires those under its supervision to provide ongoing regulatory reports to ensure ongoing oversight and compliance with German regulatory provisions.⁸ (Re-)insurance companies and IORPs have to report certain information regarding insurance portfolios with German residents during the entire duration of the remaining wind-down/run-off period. This set of information covers the status of pending portfolio transfers or run-offs, the appointment of contact persons for complaints processes and further actuarial data regarding their German (re-)insurance portfolio, e.g. premiums collected, claims settled and actuarial reserves provisioned for. 

Portfolio transfers

BaFin’s Post-Brexit Access Ruling expressly deals with the option to transfer (re-)insurance and/or IORP portfolios with German clients to (re-)insurance firms authorized to conduct business in the EU-27/EEA. However, to execute portfolio transfers in accordance with the rules applicable to EU/EEA insurers in Art. 39 of Solvency II⁹, BaFin required that portfolio transfers be initiated before the end of the transition period on December 31, 2020. This approach is in accordance with previous EIOPA’s Brexit recommendations¹⁰. 

UK (re-)insurers who may want to pursue the option of a portfolio transfer after expiry of the transition period cannot conduct such a transfer in accordance with Art. 39 of Solvency II, as the provision does not apply to third-country (re-)insurers. The specific portfolio-transfer rules for third-country (re-)insurers as provided by Art. 162 and 164 of Solvency II may not be available either, as those rules assume that third-country insurers generated insurance portfolios in a certain EU-27 market, say Germany, through a fully fledged and capitalized branch in that market, and the responsible regulators, say BaFin, expressly approved the activities of the firm, including its scheme of operations¹¹. From a German legal and regulatory perspective, it remains questionable whether the portfolio-transfer rules applicable to insurance undertakings and IORPs in Germany¹² apply to portfolio transfers of UK insurers after the expiry of the transition period. At any rate, portfolio transfers planned after December 31, 2020, require the involvement and consent of the UK regulators in the UK and the national competent authorities (NCAs) in the relevant EU-27 Member States .

Future contracts with German policyholders and the pan-EU perspective

The Post-Brexit Access Ruling clearly states that its principles do not apply to any “new” business concluded with German policyholders. Rather, the Post-Brexit Access Ruling only serves to facilitate the wind-down/run-off of existing business with German customers. Hence, the question arises how UK insurers can engage with EU-27 (prospective) clients in relation to new business. As the UK and Gibraltar are now third countries, the following market access options exist:

1. Setting up an appropriately licensed, permissioned and regulatory capitalized subsidiary in the EU-27/EEA, which could then passport its services across the EU-27/EEA on a cross-border services basis or on a cross-border establishment (branch) basis; or
2. Setting up an appropriately licensed, permissioned and regulatory capitalized third-country branch in a given EU-27/EEA Member State¹³ and have the market entry, including the firm’s underlying scheme of operations, approved by the responsible regulator¹⁴. In contrast to a subsidiary, an incoming third-country branch may only conduct business (including with certain limitations) in that given jurisdiction in which it is based; or
3. Relying on various exemptions (where they exist) for cross-border business from the UK and/or Gibraltar into the EU-27/EEA and/or relying on reverse solicitation, which is increasingly under supervisory scrutiny by the European Supervisory Authorities and thus equally EIOPA. 

Importantly and in contrast to Art. 42 of the MiFiD-II Directive, Solvency II does not answer the question, in which circumstances third-country insurers may pursue other options than the ones set out in that Directive, i.e. to establish either a subsidiary or an incoming third-country branch. It should also be noted that EIOPA has not yet provided technical guidance on this topic, for example by way of a formal opinion, which would be binding upon NCAs or by way of a Q&A. Consequently, absent definitive guidance, each of the EU-27 Member States NCA’s must answer the question whether UK firms are actually limited to the options laid down by Solvency II or whether they are entitled to conduct cross-border business in other ways than those set out by Solvency II. 

Taking this a step further, it is worth noting that the OECD provides some guidance on the issue through its Code on the Liberalization of Current Invisible Operations (the OECD Code), which was recently updated in 2020¹⁵. While not a legally binding instrument in the EU-27 and certainly not in the case of all NCAs, the OECD Code states that certain operations, including primary insurance that is not compulsory in the OECD member state where the policyholder is domiciled, should remain unregulated provided that the insurance contract is concluded on the initiative of the policyholder (insurance by way of correspondence)¹⁶. The recitals of Germany’s Solvency II transposition law refer to the 2013 version of the OECD code and take the view that insurance by way of correspondence shall remain unregulated in Germany after the transposition of the Solvency II Directive into German law¹⁷. However, it remains an open issue what the requirement that policies must be concluded on the initiative of the policyholder means in practice. The solution for cross-border insurers should be to develop standards equivalent to the already existing standards for reserve solicitation under MiFID II.

The TCA does not provide any general guidance how UK financial services providers, including insurers, could approach German customers on a cross-border basis. As explained in our Client Alert regarding reverse-solicitation principles recently issued by ESMA¹⁸, it remains to be seen whether the UK and the EU will expand the TCA to include dedicated rules for financial service providers. 

Outlook and next steps

In summary, the Post-Brexit Access Ruling grants certainty and sets supervisory expectations on how UK and Gibraltar firms will have to wind down / run off their existing contracts with German ordinarily resident or domiciled clients in an orderly manner. However, the Post-Brexit Access Ruling leaves some gaps regarding portfolio transfers initiated after December 31, 2020. 

Moreover, the Post-Brexit Access Ruling does not provide for any practical guidance on how UK and Gibraltar firms can structure new business with German customers going forward. In the interest of regulatory oversight, it imposes new reporting requirements that apply to UK and Gibraltar firms when winding-down/running-off their remaining business with existing clients ordinarily resident or domiciled in Germany. 

Solvency II does not provide for a pan-EU-27/EEA framework for third-country firms wishing to rely on reverse solicitation. The European Supervisory Authorities, notably EIOPA, have published their Supervisory Principles on Relocations (SPoRs)¹⁹, which remain unaffected by the TCA, which the BaFin and other EU-27 have applied in their supervisory practice. The SPoRs remain unaffected by BaFin’s Post-Brexit Access Ruling. While BaFin’s pragmatic and targeted measures provide certainty and consumer protection in a largely balanced fashion, any future efforts of EIOPA will need to be taken into account. Overall, affected firms will want to monitor this development to ensure they, where affected, comply with local supervisory expectations on the one hand, and use the opportunity for future business models now on the other hand. 

If you would like to discuss any of the items mentioned above, in particular how to forward-plan any compliance obligations arising from BaFin’s Post-Brexit Access Ruling on your insurance business or your future business with customers on a cross-border basis, please contact our Insurance Hub, which forms part of our Eurozone Hub, or other Brexit Board members or the listed key contacts.

1. Available here.↩
2. Available here.↩
3. Available only in German here.↩
4. Available here.↩
5. Available here.↩
6. See Sections 61 to 66a, 169, 243 to 243b VAG.↩
7. A note published by the BaFin on this subject is available here; see also EIOPA’s general overview here. ↩
8. Sections 67 (2) Sentence 1, 67 (4), 294 (7), Section 305 (1) No. 1 VAG. ↩
9. As implemented through section 63 VAG.↩
10. EIOPA-BoS-19/040 19 February 2019 Note 22, available here.↩
11. See Section 73 VAG. ↩
12. See Section 13 (1), 237 (1) VAG. ↩
13. See Sections 162 (2) and 166 Solvency II.↩
14. See Sections 162 (1) and 163 VAG.↩
15. Available here.↩
16. Art. 2 a) Annex A ↩
17. BT Drucksache 18/2956, page 255.↩
18. Available here.↩
19. For a full access to our coverage on the SPoRs please visit our Eurozone Hub. ↩