The Bank of England estimates that 36m policyholders in the UK and European Economic Area could be affected by the uncertainty © Charlie Bibby/FT
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The Bank of England secretly warned courts earlier this year to expect an onslaught of applications from insurers seeking to mitigate the legal uncertainty Brexit poses to their policies.
Although the central bank wrote to the High Court in September, the move was kept under wraps until now lest it prompt a panic by policyholders. The existence of the letter was revealed as part of the record of the BoE’s Financial Policy Committee’s November meeting published on Tuesday.
London-based specialist insurers do business in other EU countries under the bloc’s passporting rules. Often the deals last for several years.
The industry has warned that if it loses access to the EU as part of Brexit, insurers may not be legally allowed to pay out to customers in other EU countries. They are concerned that they will face breaking the law or breaking their contracts.
The BoE estimates that 6m policyholders in the UK and 30m policyholders across the European Economic Area could be affected by the uncertainty.
To mitigate this, insurers are planning to either secure new regulatory permissions for existing units or transfer contracts to new entities with correct authorisation, the FPC said. But the latter procedure would require the insurers to go to court in large numbers.
So the BoE “had written to the High Court to alert them to the potential for increased applications”, the record of the November meeting reads.
“The UK process of transferring insurance contracts relied on a court procedure that could take 12-18 months; given the volume of these applications was expected to be three to five times the normal level, there was a risk that transfers would not be completed in time,” the record adds.
The BoE redacted, on public interest grounds, references to the letter from its September meeting record.
Since then, the BoE said, the UK Treasury has given the watchdog assurances that work is under way to address the legal uncertainty hanging over vast amounts of financial contracts because of the UK’s decision to leave the EU.
The Treasury has pledged that it will consider “all options” to preserve the continuity of insurance contracts, which meant the BoE felt it could now publish its previously redacted material.
Insurers say that if they are going to complete these so-called Part VII transfers before the UK leaves the EU — and with no clarity yet on whether there will be a transition period — they need to start the process now. Many have already done so.
The Treasury, the BoE and financial regulators were all working on plans to protect UK policyholders, the central bank said on Tuesday.
The BoE has been saying for months that it is also concerned about a seizing up of the vast derivatives market, where potentially £26tn of outstanding derivatives contracts could be affected if there is no bilateral agreement between the UK and the EU — or other legislation — to deal with the long-term servicing of existing contracts between the two jurisdictions.
Last week, Andrew Bailey, the head of the UK Financial Conduct Authority, said the legal issue around financial contracts was “eminently solvable — but it does need to be solved”.
Overseas regulators are also worried. Over the summer BaFin, the German financial regulator, wrote to UK-based insurers to ask about their plans after the UK leaves the EU. It said that if the insurers lose passporting rights they will “no longer have the right to conduct insurance business in Germany”. It made it clear this includes “the settlement of claims and all other obligations deriving from a policy”.
The London Market Group, a pressure group for London-based insurers, last week proposed that the UK’s withdrawal agreement with the EU should contain specific measures that permit contracts to be honoured and claims to be paid.